2014 Wells Fargo Middle-Class Retirement Study

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1 2014 Wells Fargo Middle-Class Retirement Study Table of contents Overview 1 Key findings 2 Background and methodology 8 Overview Consistent with findings from previous surveys, middle-class Americans continue to struggle to save for retirement. While they view saving for retirement as a smart investment, dayto-day financial priorities compete with actually saving. More than two-thirds stated that saving for retirement is/was harder than they anticipated. As a result, many are procrastinating and plan to save later for retirement and pin their hopes on earning more down the road to make up for not saving now. In addition to procrastinating, the majority admit they are not sacrificing to save. A third admit that they are not saving at all for retirement. Overall, the middle class has saved just a fraction of the median amount they think they will need for their retirement. The median amount earmarked for retirement is just $20,000. Even more alarming, about half of those age have saved less than $25,000. Based on these struggles, it s no surprise that a sizeable number are pessimistic and depressed about their outlook for retirement. Many expect their standard of living will decline and a third expect they will never be able to retire. Roughly a third are even more pessimistic saying they feel they won t have enough saved to survive. One bright spot is the popularity among the middle class of the 401(k) plan as an essential retirement savings vehicle. A large percentage has access to an employer-sponsored 401(k) and most are currently contributing. Those that have access to a 401(k) have saved significantly more than those who don t and are much more optimistic about their prospects for life in retirement. Nearly all with a 401(k) plan believe that their 401(k) makes it easy to save and most middle-class Americans say that they would not have saved as much without their 401(k) or equivalent plan. The contents of this report are for information purposes only. They should not be construed as professional, legal, or tax advice or opinions. These can be properly rendered only in the context of specific facts. In all cases, you should consult your professional, legal, or tax advisors if you have questions about your individual situation. Neither Wells Fargo, nor any of its representatives, may give legal or tax advice. 68% find saving for retirement harder than anticipated. $ While 34% of middle-class Americans are not regularly contributing to a 401(k), IRA, or other retirement savings vehicle.

2 Key findings Near term priorities trump saving for retirement While nearly half of middle-class Americans give themselves high marks (A or B) on their savings discipline, near-term priorities take precedence over saving for retirement. When asked about their biggest financial priorities, saving for retirement ranked a distant fourth behind paying off ongoing student loan or credit card debt, supporting family members and saving for a first or larger home (see chart 1). Additionally, four out of 10 (41%) feel it s not possible for them to pay their day-to-day bills and still save for retirement. Only when they have reached their 50s and retirement looms nearer does saving for retirement become an important priority. Chart 1: Biggest financial priority after paying essential monthly expenses (By age segment) Total Paying ongoing student loan or credit card debt 26% 29% 31% 26% 22% 20% Supporting family members such as children, siblings, parents 22% 25% 25% 30% 15% 12% Saving for my first home, bigger home, or renovation 12% 17% 14% 11% 9% 8% Saving for retirement 11% 5% 8% 8% 24% 12% Building an emergency fund 10% 13% 10% 9% 9% 8% Paying off healthcare obligations 6% 4% 2% 3% 12% 13% Saving for future education expenses 4% 3% 4% 10% 2% 2% As further evidence of the middle class lack of retirement preparedness, a third (34%) are not contributing at all to a dedicated retirement savings account (e.g. 401(k), IRA or other savings vehicle) on a regular basis. The reasons most frequently cited echoed those above including more pressing other financial priorities (57%), lack of access to a 401(k) or other workplace plan (31%) and lack of knowledge around savings options (5%) (see chart 2). 41% feel it s not possible to pay their day-to-day bills and still save for retirement. Chart 2: Percent non-retirees regularly contributing to a retirement savings account/plan 66% 34% Primary reason for NOT contributing regularly Have other financial priorities 57% Don t have access to 401(k) or other employer-sponsored retirement plan 31% Don t know enough about my options for saving for retirement 5% Yes No 2

3 The importance of starting to save earlier While most (75%) middle-class Americans agree that saving for retirement is a smart investment (see chart 3) the reality of actually saving is a different story. More than two-thirds say that saving for retirement is/was harder than they anticipated. Chart 3: Statement that best reflects their view on saving for retirement 75% 2% 24% A necessary evil A smart investment for my future Not sure/refused The saving challenge The difficulty of establishing a disciplined savings regime could explain why more than half (55%) plan to make up for procrastinating now by saving later (see chart 4). Additionally, nearly eight in ten (79%) pin their hopes on a strategy that may work for those in their 20s and 30s who have time on their side, but the likelihood of those in their 40s or 50s being able to catch up and save enough is slim. Chart 4: Percent agreeing (By age segment) Total I plan to save for retirement later in order to make up for not saving enough now I m hoping to earn more money in the future to save enough for retirement 55% 57% 56% 63% 50% 35% 79% 94% 85% 89% 68% 54% In addition to procrastinating, sixty percent (61%) of middle-class Americans admit they are not sacrificing a lot to save for retirement. Yet, nearly nine-outof-ten say they would be willing to give up something tomorrow to save. Areas where they d be willing to cut spending in order to save for retirement included indulgences (56%), eating out (55%), making major purchases (51%), attending special events (50%) and interestingly, only 38% would be willing to forgo a vacation. 56% would give up treating themselves to indulgences like spa treatments or jewelry. 51% say they would give up a major purchase like a car or computer. 55% say they d cut eating out at restaurants. 38% would cut a vacation to save for retirement. 3

4 Not only is saving for retirement harder than they anticipated, almost three quarters (72%) wished they d started saving earlier. This is especially true for those ages 40 and older, perhaps as the reality of not being able to catch up sinks in (see chart 5). Chart 5: Start earlier to save for retirement Percent agree Total I should have started saving for retirement earlier than I did 72% 57% 66% 83% 81% 75% YESTERDAY 72% of survey respondents say they should have started saving for retirement earlier... TOMORROW... yet 55%* plan to save later to make up for not saving now. *non-retirees Retirement expectations and reality Confidence levels around their preparations and ability to retire are mixed with a little over half (53%) saying they are confident they will have saved enough to live the lifestyle they want throughout retirement. Confidence ratings decrease with age, perhaps as a result of the realization of the implications of lack of saving and planning (see chart 6). Chart 6: Percent confident they will have enough saved to live the lifestyle they want in retirement 72% 63% 44% 33% 48% Implications: Procrastination and a struggle to save for retirement is widespread among the middle class, as is the notion that they will be able to start saving later and catch up. Employers and financial service providers have an opportunity to educate plan participants and customers about the importance of starting to save early by including basic power of compounding illustrations in their communications and by providing access to basic saving calculators and budgeting tools Ages 4

5 Perhaps as a result of this lack of confidence, about half (48%) of middle-class Americans say their standard of living will/did decline in retirement, a third (34%) accept that they ll never be able to retire and nearly a third (31%) feel they won t have enough to survive. Additionally, working past the traditional retirement age of 65 is an expectation for some, with one third (34%) saying they will never be able to retire and will be working until they die or are too sick to work. Consistent with other findings, negative responses increase with age as the likely realization that putting off saving and the likelihood of making up for lost time is slim sets in. The retirement savings gap Given competing immediate financial priorities and the struggle to save, it s not surprising that most middle-class Americans face a daunting savings gap. They anticipate needing $250,000 in retirement and withdrawing a median of 10% each year. Yet, the median amount that middle-class Americans have saved towards retirement is only $20,000 (see chart 7). This is lower than the median amount of $25,000 reported last year. This gap is evident across the entire age spectrum. And, most alarming, half of those aged have saved less than $25,000 (see chart 8). Chart 7: Retirement savings Total Middle-Class Retirement savings goal (Median) $250,000 Current retirement savings (Median) $20,000 Percent saved toward goal 8% Monthly retirement savings (Median) $125 A quarter of middle-class Americans say they get depressed when they think about their financial life in retirement. Percent with zero retirement savings 19% Chart 8: Retirement savings by age Total Have saved <$25K for retirement 52% 80% 49% 38% 49% 48% The median amount middle-class Americans have saved for retirement is $20,000 and half of those aged have saved less than $25,000. 5

6 Consistent with prior year retirement survey findings, only about a quarter (28%) of middle-class Americans have a written plan for their retirement saving, despite the correlation between having a plan and successful saving. Those with a written plan have saved four times as much as those without a plan. Ironically, nearly half (49%) of those without a written plan say the main reason they don t have a written plan is lack of financial assets. Implications: The alarming lack of retirement savings exists across all age ranges of the middle class. Since having a written plan correlates with more successful saving, financial service providers and employers have the opportunity to encourage the creation of plans. Providing easy-to-use tools and resources that promote developing a plan even if you don t think you have the money to do so could help bridge this gap. The power of the 401(k) Consistent with prior year study findings, middle-class Americans value the 401(k) as a way to build a retirement nest egg. Nine out of ten (90%) with a 401(k) say their 401(k) makes it easy to save for retirement and nearly three quarters (72%) say they wouldn t have saved as much if they didn t have a 401(k) or equivalent plan. The vast majority of the middle class (70%) has access to a 401(k) or similar plan through their employer and nearly all (93%) are contributing to the plan. The median annual contribution rate is 7%. Despite the popularity of employer-sponsored retirement plans, only two-thirds (67%) contribute enough to maximize their company match. Having access to a 401(k) correlates with confidence around having saved enough to live a comfortable retirement. Additionally, those who have access to a 401(k) also save more than those who don t. Among those who do not have access to a 401(k), almost four in ten (37%) have no retirement savings at all compared to just 5% for those that do have access to a 401(k) (see chart 9). Implications: Employersponsored retirement plans, such as 401(k) plans, are viewed as an essential way for middle-class Americans to save for retirement. Given their popularity, employers can consider offering a retirement savings plan as an attractive employee benefit to recruit and retain employees. And, while most do contribute to employer-sponsored plans, further education could be done to encourage all employees to contribute up to the employer match amount, if offered. Chart 9: Access to a 401(k) and retirement savings Retirement savings goal (Median) Current retirement savings (Median) Percentage saved toward goal Monthly retirement savings (Median) Percent with zero retirement savings 401(k) Available 401(k) NOT Available Difference $350,000 $200, ,000 $30,000 $3,000 +$27,000 9% 2% +7 pts $250 $0 +$250 5% 37% -32 pts 6

7 Expectations around Social Security The vast majority of the middle class (70%) do not expect Social Security is/will be their primary source of income in retirement. Yet, this belief varies significantly with age as those who are older have a different perception on the value of Social Security in retirement (see chart 10). As an indicator of their interest in a reliable source of retirement income, half of the middle class would be willing to pay a premium, similar to auto or home insurance, to insure their future retirement income. Implications: Younger middleclass Americans have generally low expectations around Social Security benefits providing a primary source of retirement income. Yet, given their willingness to pay a premium to insure future retirement income suggests receptivity to guaranteed income products. Plan sponsors and their providers have an opportunity to explore lifetime income options to offer participants within their plans. Chart 10: Social Security as primary source of retirement funding Percent disagree Total Social Security (Non-retiree) will be (Retiree) is the primary funding source for my retirement. 70% 87% 84% 72% 54% 42% 7

8 Background and methodology About the Survey On behalf of Wells Fargo, Harris Poll conducted 1,001 telephone (901 land lines and 100 cell phones) interviews of middle-class Americans in their 20s (ages only), 30s, 40s, 50s, 60s and 70 75, surveying attitudes and behaviors around planning, saving and investing for retirement. The survey was conducted from July 20 to August 25, To target the middle class, the survey included only respondents who fell within specified income and wealth brackets. Those aged 25 to 29 had 2013 household income of $25,000 to $99,999 and household investable assets of $99,999 or less. Those aged 30 to 75 had 2013 household income of $50,000 to $99,999 or household investable assets of $25,000 to $99,999. The lower limits for 20-somethings were used to reflect the early stage of their careers. For the 20s age group, only respondents aged 25 to 29 were included in order to focus on workers. Data were weighted as needed to represent the population of those meeting the qualification criteria. Figures for education, age, gender, race, ethnicity, region, household income, investable assets, number of adults in the household, and number of phone lines (to adjust for probability of selection) were weighted where necessary to bring them in line with their actual proportions in the population. About Wells Fargo & Company Wells Fargo & Company (NYSE: WFC) is a nationwide, diversified, communitybased financial services company with $1.6 trillion in assets. Founded in 1852 and headquartered in San Francisco, Wells Fargo provides banking, insurance, investments, mortgage, and consumer and commercial finance through more than 8,700 locations, 12,500 ATMs, and the internet (wellsfargo.com), and has offices in 36 countries to support customers who conduct business in the global economy. With approximately 265,000 team members, Wells Fargo serves one in three households in the United States. Wells Fargo & Company was ranked No. 29 on Fortune s 2014 rankings of America s largest corporations. Wells Fargo s vision is to satisfy all our customers financial needs and help them succeed financially. Wells Fargo perspectives are also available at blogs.wellsfargo.com. About The Harris Poll Over the last 5 decades, Harris Polls have become media staples. With comprehensive experience and precise technique in public opinion polling, along with a proven track record of uncovering consumers motivations and behaviors, The Harris Poll has gained strong brand recognition around the world. The Harris Poll offers a diverse portfolio of proprietary client solutions to transform relevant insights into actionable foresight for a wide range of industries including health care, technology, public affairs, energy, telecommunications, financial services, insurance, media, retail, restaurant, and consumer packaged goods. Contact us for more information. Please note: This material has been prepared for informational purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Investors need to make their own decisions based on their investment objectives, financial circumstances and tolerance for risk. Investing involves risk including the possible loss of principal. Past performance is not a guarantee of future results. Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns. Please contact your financial, tax and legal advisors regarding your specific situation and for information on planning for retirement. INVESTMENT AND INSURANCE PRODUCTS: NOT FDIC INSURED NOT BANK GUARANTEED MAY LOSE VALUE Investment products and services are offered through Wells Fargo Advisors. Wells Fargo Advisors is the trade name used by two separate registered broker-dealers: Wells Fargo Advisors, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, non-bank affiliates of Wells Fargo & Company. Insurance products are offered through our affiliated non-bank insurance agencies. Wells Fargo Bank, N.A., is a banking affiliate of Wells Fargo & Company Wells Fargo Bank, N.A. All rights reserved. ECG (1 ea) 8