Morningstar Magazine - August/September 2018 - 17

EXHIBIT 1

shows how each factor influences
outcomes for mass-affluent Americans,
in the extreme.
EXHIBIT 2

Retirement Outcomes for Mass-Affluent Households in 'Normal' Markets
Density of Outcomes
Density of Outcomes

Austerity Isn't Mandatory
For each individual action, extreme changes-
like a 20% increase in contributions-
are needed to move the bulk of households into
a comfortable financial place. However,
such austerity isn't necessary. Combining multiple,
less-extreme changes can be quite effective.

For example, if Americans delayed retirement until
at least age 67 and contributed at least 6%
in the meantime, that would boost the percentage
of U.S. households having what they need from
25.6% to 71.2%. For mass-affluent households,
these two actions boost retirement readiness from
45.3% to 72.9%. EX H I B I T 3 maps the range of
such combinations of retirement age and minimum
contributions. The blue line indicates locations
on the map where 75% of Americans would have
what they need for retirement, at the intersection
of that retirement age and contribution rate,
under normal market conditions. Red in the exhibit
indicates better outcomes, and blue indicates
worse outcomes. The bottom line is that
combining multiple, less-extreme measures can
be quite effective.
One Size Fits Few
Each household, however, has its own demographic
and financial situation. Delaying retirement
can be very impactful for one individual, but not
effective for another. Similarly, as EX HIBIT 4
shows, the required contribution rate for working
U.S. households to achieve 90% of their
retirement needs varies greatly, all else being
equal. For simplicity, the exhibit removes the 28.6%
of households that would need to contribute
either more than 50% of their income or nothing
because of existing assets or Social Security
payments. No one contribution-rate prescription
fits the needs of more than 8.8% of households.
Lessons for the Industry
The current retirement outlook for Americans is
indeed bleak. Our analysis intentionally used
very optimistic assumptions-no unemployment,
no debt, no future cuts in Social Security,
a low estimate of people's standards of living in

45.3% of households have what they need.
45.3% of households have what they need.

0%
50
Percent
of
Need
Available
0%
50

100

150

200

100

150

200

Source:
Morningstar.
Values higher than 200% have been displayed at 200%.
Percent
of NeedNote:
Available

EXHIBIT 2

Cause and Effect: The Influence of Retirement Interventions
Current Situation

After Taking Action

Current Situation
After Taking Action
Cut Standard of Living to 40%

Don't Invest at All

Cut Standard of Living to 40%

Don't Invest at All

Contribute 3% More Per Year (20-Year Maximum)

Contribute 20% More Now

Contribute 3% More Per Year (20-Year Maximum)

Contribute 20% More Now

Earn 3% More in Net Returns (Alpha)

Invest 50% More in Stock

Earn 3% More in Net Returns (Alpha)

Invest 50% More in Stock

Start With 100% Savings

Delay Retirement by 10 Years

Start With 100% Savings

Delay Retirement by 10 Years

Source: Morningstar.

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Table of Contents for the Digital Edition of Morningstar Magazine - August/September 2018
