Impact of the Market Crisis on Retirement Preparedness

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1 Prudential s Four Pillars of Retirement Series Impact of the Market Crisis on Retirement Preparedness Americans are rebuilding their retirement savings, and considering guarantees to protect their future

2 Summary 1. Americans acknowledge that the market crisis has hurt their prospects for a secure retirement. Six in 10 express significant concern about their retirement savings and investments. Many are making immediate sacrifices to deal with the financial and emotional challenges, such as cutting back on spending (54%) and postponing retirement (41%). Eight in 10 reveal a need to start rebuilding their savings, and many show signs of re-evaluating their approach overall. In fact, more than four in five respondents say they wish they had been better protected, and that they are more cautious now than ever before. 2. Recovering from market losses will be a challenge, but most remain optimistic. On average, respondents think they lost 30% of their assets as a result of the market turmoil. In reaction to the crisis, 29% pulled some or all of their money out of equities in order to avoid further losses. Only 19% took the opportunity to invest more. Most, however, have made no sudden portfolio changes (52%). While 38% think they won t be able to grow back the money that they ve lost in their workplace retirement plan, the majority are optimistic, saying they will probably (47%) or definitely (15%) recoup their losses. 3. Investors are becoming more conservative. Self-reported data reveals that a year ago, on average, retirees and pre-retirees had roughly 61% of their investable assets in equities vs. today s average of 50%. Moreover, seven in 10 say that being too aggressive with your investments is riskier than being too conservative. This is in stark contrast to just two years ago when respondents were split evenly on this matter. 4. Likelihood to consider guaranteed investment products is high. When presented with ideas for guaranteed investments products, three-quarters said a product with guarantees for lifetime income, protection of principal, and opportunities to lock in market gains would be important or nice to have as part of their portfolio. Two-thirds of Americans would be likely to pursue a solution that offered guaranteed income as part of an annuity this number even includes those who have access to guaranteed income through other sources (e.g., Social Security or pensions). If protected by such guarantees, seven in 10 said they would be likely to put money back into the stock market. 5. Many are feeling a greater sense of accountability, but advisors will play a critical role in helping consumers discover options for mending their investment portfolios. Americans are paying more attention and want more control of their portfolios (at least for the immediate future). For some, this means using me as the number one source for guidance (48% today vs. 37% before the market decline). Yet, two-thirds would still trust a financial professional for information and guidance on how to best manage their retirement savings and investments. And for more complicated products, consumers still need and want to talk to advisors. In fact, 66% said their preference for learning more about guaranteed income would be by talking to a financial professional.

3 Impact of the Market Crisis on Retirement Preparedness Research Objectives Half of Americans say the recent market downturn was the worst economic time of their lives. This study reveals how Americans are: 1. Reacting to the impact of the crisis on their retirement prospects 2. Planning to rebuild their retirement 3. Reconsidering tools and assistance required to be successful Profile of Study Participants The total sample focuses on Americans in the most critical retirement planning years, and those actually living in retirement. The data throughout this study are segmented by employed (n = 500) and retired (n = 501). GENDER 61% About the Study 39% Prudential s study polled 1,001 Americans during March/April The survey was administered online and has a margin of error of ±3.1% at the 95% confidence level. Male Female Each respondent met the following criteria: Age Participates in a defined contribution plan Has retirement savings of $100,000 or more Primary or joint decision-maker on household financial decisions AGE 16% 28% 33% 19% 2% 2% INVESTABLE ASSETS 32% 34% 16% 14% 4% $100K- $250K $250K- $500K $500K- $1M $1M- $2.5M $2.5M+ Impact of the Market Crisis on Retirement Preparedness 1

4 More than 8 in 10 Americans feel the emotional and financial impact of the market crisis Vulnerabilities have been heightened The good news is that despite the market crisis, only 5% feel panicked. Yet, the 59% who have negative reactions report portfolio losses of 36% on average. The challenge now is to take these negative consequences and start the process of rebuilding savings in time to provide for a comfortable retirement. One-quarter of Americans feel powerless in that they don t know what to think about the downturn. They also report significant portfolio losses, at 31% on average. Clearly, recovery is important for them, too. Those not affected were either very smart or lucky, as 63% of their assets a year ago were not invested in equities, and their losses were limited to just 12%. Concessions are being made More than half of retired and employed Americans say the market crisis has forced them to make concessions in their lifestyle. They are spending less, postponing retirement, living modestly all in an effort to save more money and rebuild their retirement security. Half of Americans are behind in reaching their goals, so suffering market losses has led many to make immediate shifts in their behavior, with a renewed focus on protection and preservation. Retirees are making the most significant concessions. In fact, nearly half are living modestly or struggling. REACTIONS TO THE MARKET CRISIS Self-reported portfolio losses Panicked 5% The impact of the market crisis on Americans financial stability 54% Say that they ve had to make concessions in their lifestyle Disappointed 36% Regretful 18% 59% Negative 36% Among 52% Are behind schedule for their retirement savings goals 41% May need to postpone retirement 21% Have already postponed retirement Don t know 24% 24% Don t know 31% Among 47% Are living modestly or struggling Not affected 17% 17% Not affected 12% 2 Prudential Four Pillars Series

5 Retirement security is impacted by market forces as well as by investor choices and decisions Outside factors create hurdles to saving for retirement In this environment, rebuilding retirement savings is challenging. Outside factors such as market volatility, inflation, and rising health care costs influence and maybe even limit the ability to grow savings. Americans recognize these issues as significantly hurting their retirement prospects at this point in time. Even in certain areas where Americans see some glimmer of hope, such as income growth and real estate, the negative reactions far outweigh the positive ones. Employer contributions to 401(k) plans are clearly the factor that Americans see as most beneficial to their retirement prospects at this point in time. THE FACTORS AMERICANS BELIEVE ARE IMPACTING THEIR RETIREMENT PROSPECTS Personal investment decisions can also pose challenges to retirement security Despite the turmoil, half of Americans have made no changes to their investments (52%). Among these individuals, many do not know what to do and staying the course may seem easiest. However, being successful in the future may require new approaches and strategies. On average, three in 10 pulled money out of equities as a way of limiting further losses. However, they run the risk of missing out as a potential rebound begins. Americans who felt negatively affected by the downturn were most likely to pull money out of the equity market 34% did so. CHANGES TO RETIREMENT SAVINGS AND INVESTMENTS LAST SIX MONTHS Removed all or some money from equities Invested more No action Hurt Helped Your employer s contribution to 401(k) Your income growth 10% 42% 41% 28% 29% 19% 34% 18% 25% 18% 18% 20% Your job security Real estate value 15% 26% 44% 22% 52% 48% 57% 62% Health care costs 60% 7% Among Total Negative Don t know Not affected Inflation 62% 7% Based on reaction to the market downturn Government policies 67% 9% Stock market 79% 10% Impact of the Market Crisis on Retirement Preparedness 3

6 The recession has been a wake-up call for most Americans Investors vow to be more cautious Prior to the market decline, employed Americans had been primarily focused on asset growth and accumulation. During the boom years, some thought very little about protecting their assets against potential market losses. Today, more than four in five total respondents regret not being better protected and say that now more than ever they are more cautious with their retirement assets. The market decline has inspired individuals to rethink their personal responsibility to plan for retirement, and to choose effective financial products. But knowledge and confidence lag Prior to the market crisis, 56% of retirees felt they had accumulated sufficient assets to last a lifetime. Today s reality is that neither retirees nor those employed feel very confident their retirement savings will be enough. While Americans understand the importance of making their money last in retirement, many may lack the experience and product knowledge to be successful. For example, among retired Americans who are very about financial issues, 41% are very confident their assets will last, compared to only 6% of retirees who have little or no financial knowledge. FEELINGS ABOUT IMPACT OF MARKET CRISIS ON RETIREMENT SAVINGS CONFIDENT THAT SAVINGS WILL LAST THROUGH RETIREMENT Very confident Somewhat confident I wish my assets had been better protected from market losses Strongly agree Somewhat agree 15% 56% 22% 42% 44% 86% 63% 39% 55% I am more cautious now with my retirement assets than ever before Post-Crisis Pre-Crisis Post-Crisis Strongly agree Somewhat agree 35% 48% 83% IMPACT OF FINANCIAL KNOWLEDGE ON CONFIDENCE THAT SAVINGS WILL LAST THROUGH RETIREMENT % Very Confident Based on Financial Knowledge Very Somewhat Not 35% 41% 19% 11% 5% 6% 4 Prudential Four Pillars Series

7 Investors are becoming more conservative Most are shying away from aggressive portfolios The market turmoil has caused many to shift to a more conservative strategy. On average, only one in five expect their investment behavior over the next five years to be more aggressive. In fact, today, 68% feel investing too aggressively is the greater risk, versus 50% two years ago. More evidence of this shift to more conservative investment behaviors include the following points (not charted): 52% say they hesitate to invest more in stocks and mutual funds right now despite future growth opportunity. Assets held in equities declined from 62% a year ago to 50% today. When pre-retirees did reallocate 401(k) assets, 9 in 10 moved to more conservative investments. Many are not quite sure of strategy Less than one in five employed Americans feel very confident about their investment approach for retirement. And many are not sure they ll be able to grow back the money they ve lost in their defined contribution plan 38% say no and 47% answer probably rather than a definitive yes. Investors in and near retirement are searching for a cure. While being conservative for the interim may make investors feel somewhat safer, they may not achieve the growth they need nor have the income necessary to last throughout their retirement. Retirees especially are looking for opportunities for growth. In fact, 73% say they are looking for new ways to grow their assets (not charted). Yet they do recognize a need to balance growth opportunities with principal protection. CONFIDENT IN MAKING THE RIGHT RETIREMENT INVESTMENT DECISIONS ANTICIPATED INVESTMENT BEHAVIOR FOR NEXT 5 YEARS More aggressive More conservative Don t know 24% 50% 26% 17% 47% 36% Very confident 18% 71% Somewhat confident 24% 64% WHAT IS THE GREATER RISK IN INVESTING FOR RETIREMENT? Too conservative Too aggressive CONFIDENT THAT DC PLAN ASSETS WILL GROW BACK Based on employed Americans % 68% % 50% No 38% Definitely 15% Probably 47% Impact of the Market Crisis on Retirement Preparedness 5

8 Retirement income guarantees become more important in a volatile market Creating sufficient income while maintaining asset levels is a challenge One-third of retirees (32%) are funding their retirement primarily by drawing down their savings. For this population, preservation of assets may be challenged. Without a significant market recovery, they may deplete their assets sooner than expected. Three in five employed Americans expect their primary source of retirement income will be their own personal savings. They have more time to catch up, yet few are confident they will be able to save enough and preserve accumulated assets in retirement (18%). For both populations, financial knowledge has a significant impact on confidence in being able to meet critical retirement planning needs. HOW AMERICANS ARE SUPPORTING (OR EXPECT TO SUPPORT) THEIR INCOME NEEDS IN RETIREMENT IMPACT OF FINANCIAL KNOWLEDGE ON CONFIDENCE IN MAKING THE RIGHT RETIREMENT DECISIONS % Very Confident Based on Financial Knowledge Very Somewhat Not Total Gradually drawing down personal retirement savings Among Savings and planning Generating income for life 43% 46% 14% 21% 4% 6% 18% 24% Living primarily off of Social Security and/or pension, while preserving as much savings as possible 61% 39% 32% 68% Investment guarantees to support future income become important 42% have a positive opinion about investment products that offer guarantees as a means of helping to secure their future. Only 22% had negative feelings toward investment guarantees. However, 36% did not know enough about these options to state an opinion. Education and advice are critical. Close to one-third of Americans consider the most important guarantee to be a lifetime income guarantee. ATTITUDE TOWARD GUARANTEED INVESTMENT PRODUCTS Negative 22% Neutral 36% WHAT DO YOU FEEL WOULD BE THE MOST IMPORTANT FEATURE FOR YOU TO HAVE IN MANAGING YOUR SAVINGS FOR RETIREMENT? Positive 42% Guaranteed lifetime income from your retirement savings 31% 29% Flexibility how and when you take retirement income 16% 15% Guaranteed minimum annual income 17% 13% Guaranteed income to a spouse after the retiree s death 8% 13% Opportunities for increasing guaranteed income amount 7% 9% by locking in market gains Guaranteed protection of principal 6% 9% 6 Prudential Four Pillars Series

9 More than 8 in 10 employed think guaranteed investment products could be a good fit for a portion of their retirement portfolio Guarantees viewed as a good fit One in five are convinced of the importance of investment guarantees, saying it would be a perfect addition to their portfolio. A large majority say it would be at least nice to have. Most would not seek guarantees for 100% of their portfolios. Typically, Americans say they would want to protect about 30% of assets. The majority are willing to consider investment guarantees approximately six in 10 say they would be at least somewhat likely to consider guaranteed products. Interest levels are high among employed Americans as well as retirees. These guarantees are of interest even among those who feel ahead of schedule in saving for retirement or who already have other sources of retirement income. For example, 64% of investors with a pension are willing to consider guarantees for a portion of their non-pension retirement assets (not charted). More scenarios for acquiring guarantees Likelihood to consider guarantees appears to be equally high no matter which avenue presented to investors whether it be directly through a variable annuity or within a 401(k) plan. This interest in guarantees in the aftermath of the crisis shows investors are open to considering new product solutions and that many consumers appreciate the potential value of guarantees. In fact, half said that in concept they would pay extra for an add-on to an investment product if it could guarantee income, growth, and protection of principal (not charted). The protection of guarantees could steer investors back into the market Many would consider venturing into the equity market again if guarantees were in place. Guarantees would also encourage many to invest less conservatively to give themselves a better chance to rebuild their retirement savings. HOW CONSUMERS FEEL GUARANTEED PRODUCTS WOULD FIT INTO THEIR PORTFOLIO A perfect addition to my portfolio Nice to have in my portfolio I don t think I need it in my portfolio Percentage of portfolio for which investors feel guarantees would be appropriate HOW INVESTMENT BEHAVIORS MIGHT CHANGE IF PROTECTED BY GUARANTEED PRODUCTS Definitely Probably Put some money in or back in the stock market 76% 32% 29% VEHICLES THROUGH WHICH INVESTORS SHOW LIKELIHOOD TO CONSIDER GUARANTEED FEATURES Very likely Somewhat likely Within a variable annuity 18% 43% 61% As option in 401(k) plan 20% 39% 59% As rollover of 401(k) assets 21% 40% 61% 19% 57% 22% 61% 17% 61% 13% 48% 83% 14% 54% 32% 68% Choose more aggressive investments with greater potential for return 63% 17% 46% 49% 9% 40% Impact of the Market Crisis on Retirement Preparedness 7

10 Advisors will play a critical role in helping consumers discover options for recovery Consumers take more control After experiencing the market decline, consumers recognize a need to become more responsible for their own retirement planning. Advisors are still critical; however, advisors face the task of rebuilding consumer trust. While consumers typically do not blame advisors for the market downturn, trust going forward is an issue. DEGREE OF TRUST CONSUMERS HAVE IN THEMSELVES AND THEIR ADVISOR FOR RETIREMENT GUIDANCE Me Definitely Somewhat No Financial Professional 58% 35% 7% 28% 40% 32% Two-thirds still turn to their advisor For more complicated products in particular, consumers need and want to talk to advisors. In fact, roughly two-thirds of Americans said one of their top choices for learning more about guaranteed variable annuities would be talking to a financial professional. A close second is the Internet, which in many cases would be used in preparation for meeting face-to-face with an advisor. Many would also consider using new or additional advisors Consumers may be less loyal to current advisors than they had been. For example, 78% said they would consider using a financial professional other than their own if interested in a guaranteed retirement income product that was not available from their current advisor. LEARNING MORE ABOUT GUARANTEED PRODUCTS Ranked as #1 choice Ranked as #2 or #3 choices LIKELIHOOD TO SPEAK WITH AND PURCHASE FROM FINANCIAL PROFESSIONAL OTHER THAN THEIR OWN Not likely 22% Very likely 17% Somewhat likely 61% Talk with advisor Use Internet to research Talk with advisor Use Internet to research 38% 26% 64% 24% 32% 56% 44% 24% 68% 18% 38% 56% 8 Prudential Four Pillars Series

11 Prudential s Four Pillars of Retirement The Four Pillars of Retirement represent the foundation of retirement security today, from Social Security to the choices made in retirement. Prudential uses these pillars as a framework for research reports, press releases and other information about the retirement issues and challenges facing Americans today. SOCIAL SECURITY EMPLOYMENT- BASED PLANS PERSONAL SAVINGS RETIREMENT CHOICES 2009 The Prudential Insurance Company of America, 751 Broad Street, Newark, NJ ALL RIGHTS RESERVED. Prudential Financial, Prudential and the Rock logo are registered service marks of The Prudential Insurance Company of America and its affiliates RTLI-D3865