What it Really Means to Be Retirement Ready

Pre-retirees feel they are “in good financial shape.” So why are they so concerned about retirement planning?

by Allison Pearson

Ms. Pearson is the Assistant Vice President to the National Sales Desk with Jackson National Life Distributors LLC. Connect with her by e-mail: Allison.pearson@jackson.com.

With the fate of pensions in Illinois and Detroit making headlines on what seems to be a daily basis, it’s no wonder that retirement planning among baby boomers (or lack thereof) is receiving renewed interest from both the media and pre-retirees themselves. Yet “interest” is not always the same as “knowledge” or “understanding,” as revealed in the recent Investor Education Survey from Jackson National Life Insurance Company®. The results of the survey indicate that, while the majority of pre-retiree men and women (which the survey defined as those between the ages of 45 and 65) see retirement planning as their top financial concern, they also may not be aware of just how much work this entails.

Although nearly 75 percent of both men and women indicated that saving enough money for retirement was their top financial concern, when asked their biggest obstacle to achieving their financial/investment goals, close to 57 percent of respondents said they were “in good financial shape” and did not “have any major obstacles.” Contrast this with the fact that 55 percent of women and 42 percent of men indicated that their understanding of financial products, terms and methods was either “basic,” or even worse, that they had “little to no understanding” of these items, which are critical in helping investors save enough to retire comfortably, or at all.

What do they really know?

On the surface, the statistics showing that people in this survey group are making retirement planning a priority and that they are confident in their ability to reach their goals, are encouraging. However, the fact is that a good portion of these same pre-retirees admit they know, at best, the basics about financial products, terms and methods.

In the end, it all comes down to knowledge. In addition to the baseline statistics listed above, the results of the 2013 Jackson Investor Education Survey also show that pre-retirees may not have a complete understanding of the increases in cost of living they will face in retirement. To begin to eat away at this gap between perception and reality, let me start by defining what I mean by “cost of retirement.”
For our purposes, “cost of retirement” can be an umbrella term that encompasses the combination of a loss of income (via a steady paycheck), the total money gained from new income streams in retirement (i.e., Social Security, annuity payouts, etc.), and the total costs of living in retirement, which include both the definitive (i.e., weekly food expenditures, water and electric bills, etc.), the potential (i.e., increasing healthcare costs, costs of long-term care, cost of supporting adult children or grandchildren) and the unknown (rate of inflation). Only with all of these in mind can an investor reasonably approach retirement goals with a true understanding of what it may take to retire from the workforce.

From the survey results, I’m concerned that many pre-retirees don’t have the full picture of what retirement planning takes, or may just be fearful of planning for the unexpected. Let’s look at the issue of ongoing medical expenses. Only 12.8 percent of men and 9.5 percent of women chose long-term care expenses “for me, my spouse/partner and/or my parents” as their top financial concern. In general, it seems to me that people just don’t want to think about the necessity for long-term medical care, and for that reason, they don’t think about planning for it. Yet isn’t this an expense that’s likely to arise in retirement? Many may be planning to use Medicare, which most Americans are eligible for at age 65, to pay for their healthcare in retirement. However, when the unexpected happens, you might be surprised at just how little Medicare will cover.

For example, if you develop a medical condition that requires skilled nursing care, Medicare will cover 100 percent of your costs for only 20 days. For the next 80 days, you are responsible for $140 of your expenses. Should you require ongoing treatment after 100 days (or just about three and a half months) of medical care, you will then need to find a way to cover 100 percent of your expenses. This is, of course, assuming that you’re eligible for Medicare at the time of your medical emergency. If you retire early without a plan for healthcare expenses, you could experience a gap of medical coverage when you need it most.

Planned vs. unplanned life events

...“cost of retirement” can be an umbrella term that encompasses the combination of a loss of income (via a steady paycheck), the total money gained from new income streams in retirement (i.e., Social Security, annuity payouts, etc.), and the total costs of living in retirement

Perhaps now you’re beginning to see the gap between planned income and unplanned life events. Retirees may plan on using Medicare in retirement, but if a long-term health issue costs more than the program will cover, other funds will be needed to fill the gap. Without proper planning, money that was meant to be used for utilities, housing, etc., may be applied towards healthcare.

At least there seems to be one thing that pre-retirees agree on: whatever their financial concern, they don’t foresee themselves relying on Social Security Income to cover it. Only 2.1 percent of men and 0.3 percent of women said that Social Security will provide enough for them to retire comfortably. By far the majority of respondents, 64.2 percent of men and 66.9 percent of women, said that Social Security will only be a supplement to their retirement income.

Which brings me to my original point: If investors, who admit they have only a basic knowledge of financial planning and investments, don’t plan on using Social Security to fund their retirement, how are they planning for a comfortable retirement? And how are they planning to pay for big expenses such as health care or college tuition? In my opinion, it seems that the gap between those who need financial education and those who seek it out needs to be addressed.

Now 41.4 percent of men and 49.7 percent of women respondents said they work with a financial advisor to make financial decisions, which I take to mean close to half of the survey takers represent an opportunity for the financial industry. Only 12.8 percent of men and 16.3 percent of women respondents saw furthering their financial education as a priority. If the financial services industry can address the issues that investors (or potential investors) see as a roadblock to their financial confidence, perhaps more people would see the value of furthering their financial education and seek out the help of an advisor.

Where did all the trust go?

Here’s what holding them back: When asked about obstacles to achieving their financial goals, survey takers said they don’t trust advisors to manage their money, but also don’t have enough information to invest on their own. Don’t take it personally — the financial crisis shares the blame in dispelling trust among investors as another portion of respondents said they lost their financial confidence after 2008. Others responded that they simply don’t know how to improve their investing confidence.

It seems that the financial planning industry could use some positive public relations. As an industry, we need to promote the lessons learned from the financial crisis that may rebuild the trust of risk-averse investors. We also need to better educate investors about the value-add of a financial planner.
A good portion of survey takers, 43.9 percent of women and 25.8 percent of men, said they don’t have enough time to review the extensive materials out there for investor education. It makes sense then that respondents said “easier-to-understand and more transparent” investment literature would help to improve their financial outlook, and more than 33 percent of both men and women said having assistance sorting through these materials and breaking down how the information applies to their individual situation would also have a positive impact on their financial situation.

Not only do investors need to be aware of the cost of retirement, a college education and unexpected medical expenses, I would hope that more education about financial products would offer valuable knowledge to help them create a better retirement outlook. The gap between investors in need of financial education and advisors who can provide a valuable service is growing. It’s time to build a bridge to financial confidence.