Data Knows Best: What Retirement Research Says About Your Client's Retirement Planning

Virtual Learning Event: Retirement Revised
https://learn.extension.org/events/2934
Data Knows Best: What Research Says About
Your Client’s Retirement Planning
This material is based upon work supported by the National Institute of Food and Agriculture, U.S. Department of Agriculture, and the Office of Military
Family Readiness Policy, U.S. Department of Defense under Award Number 2015-48770-24368.

Connecting military family service providers
and Cooperative Extension professionals to research
and to each other through engaging online learning opportunities
militaryfamilies.extension.org
Sign up for webinar email notifications at militaryfamilies.extension.org/webinars

Today’s Presenter
2
Kimberly Blanton
Developed and writes Squared Away, a
personal finance and retirement blog at Boston
College. Former financial and economics
reporter who wrote for The Boston Globe, The
Economist, and other publications.

3
(Retired Maj.) Leland T. Blanton
1935-2004
1955

4
The Blantons
Tachikawa Air Force Base
Tokyo, Japan 1959
And then there were three:
Loring Air Force Base
Limestone, Maine 1963

Kim Blanton, blogger
Squared Away Blog: Work, Save Retire
Center for Retirement Research at Boston College
Military Families Learning Network
June 6, 2017
The Data Knows Best:
What research says about
your client's retirement planning

What is the scope of the problem?
Big and growing.
Source: Alicia H. Munnell, Wenliang Hou, and Anthony Webb. 2014. “NRRI Update Shows Half Still Falling Short.” Issue in Brief 14-20.
Center for Retirement Research at Boston College.
The National Retirement Risk Index, 1983-2013
31% 31% 30%
37% 38%
40%
38%
45% 44%
53% 52%
0%
20%
40%
60%
1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013
7

The retirement shortfall is driven by:
• Americans living longer.
• Rising health care costs.
• Transition from defined benefit to defined contribution plans.
• Not enough savings in employer retirement plans.
• Inadequate retirement income (the goal: 70-80% of an older
person’s earnings from working should come from pensions,
savings, and Social Security when they retire).
• Erosion in Social Security benefits as full retirement age increases.
• Poor financial literacy.
• A tenuous understanding of how Social Security benefits work.
• The growth of a contingent labor force?
8
Source: Center for Retirement Research and Squared Away blog at Boston College.

Longevity is up.
Life Expectancy Upon Reaching Age 65, 1960-2020
Source: U.S. Social Security Administration. 2015. The Annual Report of the Board of Trustees of the Federal Old-Age and Survivors
Insurance and Federal Disability Insurance Trust Funds. Government Printing Office.
13.2
14.7
17.6
19.7
17.4
18.8
20.3
21.9
0
5
10
15
20
25
1960 1980 2000 2020
Men
Women
9

Yet older Americans are only working a bit
longer.
Average Years in Retirement for Men, 1960-2050
Note: Average retirement defined as when 50 percent of individuals are not participating in the labor force.
Sources: Center for Retirement Research at Boston College estimates from U.S. Census Bureau. Current Population Survey, 1962-2015;
and U.S. Social Security Administration 2015. The Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance
and Federal Disability Insurance Trust Funds. Government Printing Office.
60
65
70
75
80
85
90
95
Average retirement age
Life expectancy
13 years 22 years20 years18 years
10

Retiree health care costs are high and rising.
Medicare Part B Premium and Out-of-Pocket Payments as
Percentage of Average Social Security Benefits, 1980-2030
Source: Centers for Medicare & Medicaid Services, Office of the Actuary. 2015. “SMI Out-of-Pocket Expenses as a Percent of Illustrative
Social Security Benefit.”
6.8%
14.7%
19.4%
0%
4%
8%
12%
16%
20%
24%
1980 2015 2030
11

The U.S. retirement system is contracting.
Defined Contribution
Plans: 401(k), TSP
Defined Benefit Plans
Individual Saving
Employer-Sponsored
Pensions
Social Security
Retirement Income
12

Employer plans have shifted from traditional
pensions to defined-contribution plans (i.e.,
401ks in the private sector).
Source: Center for Retirement Research at Boston College calculations based on U.S. Board of Governors of the Federal Reserve System.
Survey of Consumer Finances, 1983, 1992, 2001, and 2013.
Workers with Pension Coverage by Type of Plan, 1983, 1992, 2001, and 2013
62%
12%
26%
44%
40%
16%
23%
61%
16%17%
71%
13%
0%
20%
40%
60%
80%
Defined benefit only Defined contribution -
401(k) plans - only
Both
1983
1992
2001
2013
13

U.S. retirement today: sink or swim.
14
Source: Digital Vision

15
Younger workers are making some progress.
Defined Contribution Plan Accumulations* of Working Households
with Plans by Age Group, 2007, 2010, and 2013
Note: *Median 401(k)/IRA balance. Sample excludes households that are not working and those that have only an IRA.
Source: Center for Retirement Research at Boston College’s calculations from the 2007-2013 SCF.
$44,000
$75,000
$118,000
$35,000
$70,000
$120,000
$48,000
$100,000
$111,000
$0 $50,000 $100,000 $150,000
35-44
45-54
55-64
2013
2010
2007

Typical boomer with retirement savings has
only $111,000. The distribution by income:
Source: Alicia H. Munnell. 2014. “401(k)/IRA Holdings in 2013: An Update from the SCF.” Issue in Brief 14-15. Center for Retirement
Research at Boston College.
Defined Contribution Plan Balances for Median Working Household Who Have Plans,
Age 55-64, by Income Quintile, 2013
$452,000
$132,000
$100,000
$53,000
$13,000
$0 $200,000 $400,000 $600,000
Top
Fourth
Third
Second
Bottom
16

Social Security replacing a shrinking share
of pre-retirement earnings.
Social Security Replacement Rates for Average Earner Retiring at Age 65, 1985, 2000, 2015, and 2030
Sources: Centers for Medicare and Medicaid Services. 2014. Unpublished data from Annual Report of the Board of Trustees of the Federal
Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds. Government Printing Office; and U.S. Social Security
Administration. 2014. Unpublished data from The Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance
and Federal Disability Insurance Trust Funds. Government Printing Office.
17
42%
39% 39%
36%
40%
37% 36%
32%
36%
30%
0%
20%
40%
60%
1985 2000 2015 2030
Reported replacement rate (retirement at age 65)
After Part B SMI deduction
After personal income taxation

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Year of Birth Full Retirement Age
1937 or earlier 65
1938 65 and 2 months
1943--1954 66
1960 and later 67
The cause of Social Security’s erosion.
Source: U.S. Social Security Administration

Yet many people still file for Social Security
at 62 when benefits are at their lowest.
19

Historically low interest rates reduce what
people earn on their nest eggs.
Real Interest Rate, 1990-2015
Sources: U.S. Board of Governors of the Federal Reserve System. 2015. Selected Interest Rates (Daily) – H.15. Available at
http://www.federalreserve.gov/releases/h15/update/default.htm; Joseph G. Haubrich, George Pennacchi, and Peter Ritchken. 2012.
“Inflation Expectations, Real Rates, and Risk Premia: Evidence from Inflation Swaps.” The Review of Financial Studies 25 (5):1588-1629.
-2%
0%
2%
4%
6%
1990 1993 1996 1999 2002 2005 2008 2011 2014
20

21
The upshot: today’s older households
have 9% less pension wealth today.
Median DB + DC wealth:
1998: $179,000 2010: $163,000
Source: Center for Retirement Research at Boston College.

22
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
45.00%
50.00%
Most educated quartile Quartile 3 Quartile 2 Least educated quartile
Retirement inequality grows: how retirement
wealth distributed has changed (DB + DC).
1992 2010

Defined contribution plans could work, but
people make mistakes at every step.
Prevalence of 401(k) Mistakes
21%
53% 54%
25%
99%
0%
20%
40%
60%
80%
100%
Individuals
not
participating
in 401(k)
Individuals
contributing
6 percent or
less
Assets in
high-fee
funds
Loss of
assets due to
leakages
Individuals
who do not
annuitize
Sources: Author’s calculations based on U.S. Board of Governors of the Federal Reserve System. Survey of Consumer
Finances, 2013; Vanguard. 2015. “How America Saves 2015: A Report on Vanguard 2014 Defined Contribution Plan Data.”; Investment
Company Institute. 2014. “ICI Research Perspective.” 20(3); and Alicia H. Munnell and Anthony Webb. 2015. “The Impact of Leakages
from 401(k)s and IRAs.” Working Paper 2015-2. Center for Retirement Research at Boston College.
23

24
Thrift Savings Plan:
What missteps or mistakes do you see your
clients making?
These will also carry over their private sector
employment.
Source: U.S. Social Security Administration

Yet having a retirement plan is still critical,
because people do not save on their own.
Source: Alicia H. Munnell. 2014. “401(k)/IRA Holdings in 2013: An Update from the SCF.” Issue in Brief 14-15. Center for Retirement
Research at Boston College.
Wealth of Typical Household with Head Age 55-64, 2013
$301,300
$153,700
$69,100
$40,100
$12,500 $14,100
$0
$100,000
$200,000
$300,000
$400,000
Social
Security
Defined
benefit
Primary
house
Defined
contribution
Financial
assets
Other assets
25

It’s obvious why it’s important to shore up
Social Security. Fully funded only to 2034.
Source: Alicia H. Munnell. 2015. “Social Security’s Financial Outlook: The 2015 Update in Perspective.” Issue in Brief 15-12. Center for
Retirement Research at Boston College. U.S. Social Security Administration.
Projected Social Security Income and Cost Rates, as a Percentage of Taxable Payroll, 1990-2090
0%
4%
8%
12%
16%
20%
1990 2010 2030 2050 2070 2090
Income rate
Cost rate
26

Beyond 401(k)s, many proposals exist to
cover the half of U.S. workers
who have no plan.
• Auto-IRA plans (Obama Administration and state
governments)
• NEST accounts (United Kingdom)
27

28
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We could get more into defined contribution
plans by making them automatic…
Percentage of 401(k) Plans with Automatic Enrollment and Automatic Escalation
Percentage of Plans with
Automatic Enrollment, 2015
Percentage of Automatic Enrollment Plans that
Increase Default Deferrals over Time, 2013
41%
59%
With Without
35%
35%
30%
With Without Voluntary
Sources: Vanguard. 2016. “How America Saves 2016;” and Plan Sponsor Council of America. 2014. “57th Annual Survey of Profit
Sharing and 401(k) Plans.”

…reduce money leaking out…
Source: Author’s calculations based on Vanguard. 2015. “How America Saves 2015: A Report on Vanguard 2014 Defined Contribution
Plan Data.”
Annual Leakages Out of Vanguard Accounts as a Percentage of Assets, 2014
0.6%
0.3% 0.3% 0.3%
0.0%
0.3%
0.6%
0.9%
Cashouts Hardship
withdrawals
Post 591/2
withdrawals
Loan defaults59½
29

…and keep an eye on investment fees.
Fees as a Percentage of Assets for Actively Managed and Index Funds, 2014
Source: Investment Company Institute. 2015. “2015 Investment Company Fact Book.”
0.86%
0.63%
0.11% 0.11%
0.0%
0.5%
1.0%
Equity Bond
Actively managed
Index
30

High investment fees are a particular
concern in 401ks and IRAs.
Private Retirement Assets, Trillions of Dollars, 2015 Q3
Source: U.S. Board of Governors of the Federal Reserve System, Flow of Funds Accounts of the United States, 2015.
$3.1
$5.2
$7.3
$0
$2
$4
$6
$8
Defined benefit plans Defined contribution
(401(k) plans)
IRAs
31

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Questions: the U.S. retirement system`
• What age are your clients in the military?
• Are they on a path to being better or worse off than most
Americans? And why?

33
Why do people do what they do – and
why?
Our blog answers questions like these!
(we scours the latest financial research – so you don’t have to.)
Yes, I’m plugging our blog! squaredawayblog.bc.edu kimberly.blanton@bc.edu

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Change Roils the Family – Think of the
Financial Ramifications!
• 1 in 10 Gen-X moms is single
• Women are heads of 4 in 10 families
• A majority of wives work
• Half of Americans don’t live near mom
• Women are having babies 5 years later
• The divorce rate has doubled since 1990 – blame boomers
• 2 in 3 older single people are divorced
Sources: NYTimes.com, Squared Away, Center for Retirement Research.

35
Source: National Endowment for Financial Education.

36
Why so stressed?
Half of Americans are living paycheck-to-
paycheck.
Two out of three – Democrats and Republicans
– say high medical costs a top priority.
Source: National Endowment for Financial Education and Kaiser Family Foundation.

37
More stress: half of private-sector workers aren’t saving for
retirement.

38
Financial psychologist Brad Klontz says avoiding money issues is most
common among people ensnared in debt or not saving for retirement.
The upshot: the people who consult financial advisers and read personal
finance blogs don’t need the help as much as the avoiders.
How do you reach them?

39
Poor financial literacy is a concern:
One in four people got no more than seven correct
answers to 28 financial questions.
Source: Survey by Global Financial Literacy Excellence Center, George Washington University.

40
Financial Advice:
What the research recommends

For young adults, some straightforward answers:
Plan on working longer to:
• shrink the period of time in retirement.
• increase monthly Social Security benefits.
• Save more in employer plans;
• Decide whether buying a house now could become a
retirement asset later in life.*
*tricky for military personnel who are being transferred around.
41

42
How much should young adults save
for a secure retirement? Depends.

43
Harder for boomers to catch up by saving.
But it’s not too late!
• Work longer – there are many benefits.
• Get more every month from Social Security – find out
how much.
• Consider the house – home equity is an asset.

Working longer: increases the ratio of
working years to retirement years.
Source: Author’s calculations; and Charles D. Ellis, Alicia H. Munnell, and Andrew D. Eschtruth. 2014. Falling Short: The Coming
Retirement Crisis and What to Do About It. Oxford, UK: Oxford University Press.
44
Years of work Years of
retirement
Work:
retirement ratio
40 20 2:1
45 15 3:1

Working longer is feasible for most –
without sacrificing a lengthy retirement.
Note: For the ratio of expected retirement to working years, people are assumed to start work at 20.
Source: Author’s calculations using U.S. Social Security Administration. 2004. Life Table Functions Based on the Alternative 2 Mortality
Probabilities in the 2004 Trustees Report (unpublished).
Retirement Age Equal to Age-65 Retirement in 1940,
Based on Rising Life Expectancy (In Years: Months)
Year
Age at which ratio of expected retirement
to working years remain constant
1940 65:00
1950 65:11
1960 66:08
1970 67:06
1980 68:00
1990 68:06
2000 69:00
2010 69:07
2020 70:02
2030 70:08
45

46
Your clients won’t always get what they want in
retirement. But they just might find they get
what they need. Photograph: Claude Gassian

47
It’s Not Necessary to Work to 70 either –
Every Extra Year Can Help

48
Women Gain More from claiming at age
70, rather than 62.
Women:
88% Increase Men:
82% Increase
Increase in monthly Social Security check

49
Social Security: 35 is the magic number
• Do your young adults appreciate the importance of 35 years of
highest earnings on which Social Security benefits are based?
• Are your older clients willing to delay retirement?
• How does the tricky decision about when to become a mother play
out among women in the military? Are their earnings or hours
affected?

A big issue for boomers is how they will
draw down their savings once they retire.
Percent of Remaining Median Assets in 2002 for Singles Ages 72-81 in 1995,
by Permanent Income Quintile
Source: Mariacristina De Nardi, Eric French, and John Bailey Jones. 2009. “Life Expectancy and Old Age Savings.” American Economic
Review: Papers and Proceedings 99(2): 110-115.
14%
64%
77%
72%
92%
0%
25%
50%
75%
100%
Bottom Second Third Fourth Top
50

Finally, we need to convince retirees to view
their house as a potential source of income.
51
Photographer: Siri Stafford

Older Americans: home equity
52

People can get money from their house in two
ways:
Source: Steven A. Sass, Alicia H. Munnell, and Andrew D. Eschtruth. 2014. Using Your House for Income in Retirement. Center for
Retirement Research at Boston College.
53

Draw-down solutions include buying an
annuity or using sensible rules of thumb.
• Single Premium Immediate Annuities
(SPIAs) provide a secure flow of
monthly income throughout retirement.
• Advanced Life Deferred Annuities kick
in later than SPIAs, providing income
for a shorter period but at a very low
cost.
• IRS’ Required Minimum Distribution
Rules provide a reasonable way to draw
down your assets without an annuity.
54

The vast majority of your clients will not
retire from the military – they’ll retire from
the private sector.
It’s crucial to remember how few private-
sector employees have an retirement plan:
50% of private-sector workers.
12% of low-income workers.
Source: U.S. Census Bureau. Current Population Survey, 1980-2015.
55

56
Given the low participation in saving,
what are the most important things you can
discuss with clients about their future outside
the military?

57
The basics:
• A 401(k) is the private sector’s version of the government’s
Thrift Savings Plan.
• When looking for a private-sector job, ask whether a
prospective employer has a 401(k) – and the size of the match.
• Sign up for the new employer’s plan asap, if one exists and
especially if there’s a match.
• If not, an IRA serves the
• same purpose.
• Be sure to save enough:

58
Defined contribution match: the private sector
Type of match Example % of plans
Single-tier 50 cents per $1 contribution on first 6% of
employee’s pay
75%
Multi-tier $1.00 per dollar contribution on first 3% of
pay; 50 cents per dollar on next 2% of pay.
15%
Dollar cap $2,000 maximum using single- or multi-
tier formulas.
7%
Misc. Various formulas based on age, tenure or
other characteristics.
3%
Boston College
Harvard
8% match on contribution of 2% of pay.
10%-15% match. Depends on pay level.
Source: Vanguard Inc.

Conclusion
• The current retirement income system will deliver less when
people need more.
• We can solve the problem by:
o starting to save or saving more
o working longer
o fixing Social Security and automating 401(k)s
o expanding coverage to workers who don’t have retirement
savings plans
o using home equity.
59

60
How to find our blog: squaredawayblog.bc.edu
Sign up here

61
Questions? Comments?
Thank you for having me!
Kim Blanton
Blogger
Center for Retirement Research at Boston College
kimberly.blanton@bc.edu
squaredawayblog.bc.edu

62
We invite MFLN Service Provider Partners
to our private LinkedIn Group!
https://www.linkedin.com/groups/8409844
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Branch Services
Reserve
Guard
Cooperative Extension

Evaluation and
Continuing Education Credits
MFLN Personal Finance is offering 1.5 CEUs for
today’s webinar for AFC-credentialed and CPFC-
credentialed participants.
Please complete the evaluation and post-test
at:https://vte.co1.qualtrics.com/jfe/form/SV_eqvV
FWUzeVcsJO5
Must pass post-test with an 80% or higher to
receive certificate.
63

65
The New Retirementality
• Date: Wednesday, June 7, 2017
• Time: 11 a.m. Eastern
• Location: learn.extension.org/events/2920
For more information on MFLN Personal Finance go to:
https://militaryfamilies.extension.org/personal-finance/
Personal Finance Virtual Learning
Event – Next Session

This material is based upon work supported by the National Institute of Food and Agriculture, U.S. Department of Agriculture, and the Office of Military Family
Readiness Policy, U.S. Department of Defense under Award Number 2015-48770-24368.
militaryfamilies.extension.org/webinars

Data Knows Best: What Retirement Research Says About Your Client's Retirement Planning

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