The Myth of the Nest Egg
For decades we’ve focused on the nest-egg notion as the goal for retirement saving, benchmarking our progress in relation to that lump sum. But it has no context other than probably being the single biggest “paycheck” most of us will ever see.
That lump sum may sound great to me, but what does it mean for my spending over 20 or even 30 years without a paycheck?
What’s My Number?
As our recent survey of defined contribution (DC) participants discovered, most workers have no idea what level of spending their retirement account can safely afford them. Most either guess too high or can’t even guess. Over a third of our respondents said you could withdraw 10% or more, which would probably deplete your savings within 15 years.
The crucial issue here is the false sense of security that a lump-sum number might convey.
The Department of Labor gets this and may soon make an initial proposal requiring DC plans to provide participants with a personal retirement-spending forecast—based on their current DC account balance and prominently displayed on their quarterly statements.
Most workers actually get the importance of this personalized forecast, too. We asked our respondents if they’d value such a forecast, and over 92% of them said yes.
Personalized Forecasting Is Good, but Not Great
Personalized forecasting stands a better chance of making an impact on workers than most DC participant communications or education initiatives. The raw reality of such personalization may spur participants to save more—especially if their plan’s retirement calculator can easily and quickly show them the long-term difference that an increase of even one or two percentage points in their deferral rate could make.
But a retirement income forecast would probably assume you’d take out an annuity upon retirement (which very few new retirees do) so that the assets could truly last as long as you lived. And the forecast would also be based on assumptions about average annualized market returns for stocks and bonds.
Unfortunately, markets rarely ever turn in that “average” in any given year—sometimes posting decade-long stretches of underperformance. And what if you retire and need to start that annuity when stocks are in a deep trough, as they were in early 2009?
The forecast—and your personal benchmark—needs more certainty to instill any retirement confidence.
That certainty could be fostered by a secure-income option within the DC plan. It would guarantee a minimum level of income based on assets already accumulated in the account—a guarantee that protects participants from the risk of outliving their money and from the impact of market swings on their retirement income, while also providing the opportunity for growth.
Secure Income Is the Missing Link to Confidence
Certainty of retirement income would help participants assess whether or not they’re truly “on track” for their retirement—not someone else’s and not some estimated average. And we’ve already seen that this does, indeed, spur a desire to save more.
When United Technologies Corporation launched a Lifetime Income Strategy (LIS) default option last year, they received a lot of inquiries from participants, asking “What’s my number?” Quite often, participants realized that the retirement savings pace they’d set for themselves wasn’t going to satisfy the standard of living they wanted in retirement.
This was the wake-up call to start saving more. But it also gave them the certainty and courage to commit to saving more now, knowing their efforts would be rewarded.
DC plans are now the primary retirement vehicle for most Americans. While they were initially designed to give participants great freedom of choice, that now appears more like the freedom to fail. But DC plans can now take a new approach to help solve America’s coming retirement crisis.
I believe that DC plans should provide participants with personal retirement savings benchmarks to keep them aware, and secure income solutions to keep them saving confidently and adequately to reach their personal goals.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.
Seth J. Masters is Chief Investment Officer of Defined Contribution Investments and Asset Allocation at AllianceBernstein and Chief Investment Officer of Bernstein Global Wealth Management, a unit of AllianceBernstein.