Morningstar Magazine - August/September 2018 - 18

0.000

Dispatches

0%
10
20
30
Contribution Rate That Households Need to Reach Their Goal (90th Percentile of Surety)

Percent OK:

100

50

0

75% of Americans

40

Retirement Age (Minimum)
70

EXHIBIT 3

Range of Combinations of Retirement Age and Minimum Contributions
Percent OK:

100

50

0

68
Retirement Age (Minimum)

75% of Americans

70
66
68
64
2.5
0.0%
Contribution Rate (Minimum)

5.0

0.0%
2.5
Contribution Rate (Minimum)

5.0

7.5

10.0

66
64
7.5

10.0

Source: Morningstar.

EXHIBIT 4

Personal Circumstances Also Affect the Impact of Contribution Rates
Relative Number of Households
0.100

This is where most people are
defaulted in their 401(k).

0.075
0.050
0.025
0.000
0%
10
20
30
Contribution Rate That Households Need to Reach Their Goal (90th Percentile of Surety)

40

retirement-and yet only 25.6% of working U.S.
gIndividually, even these levers require extreme
households are on track to have what they
actions to move the needle-like a 10-year
need. While mass-affluent households are better
delay in retirement. Combined, however, they are
75% of Americans
100 50
0
Percent OK:
Retirement Age (Minimum)
off, less than 50% will have what they need.
far more powerful and do not call for extreme
70
actions. A minimum 6% contribution rate,
for example, combined with a minimum retirement
Broad financial planning is essential, and multiple
age of 67 would help 71.2% of households have
tools can help Americans succeed in retirement:
68
what they need (up from 25.6% currently).

Contribution Rate (Minimum)
18

Morningstar August/September 2018

gThe generic default of a 3% contribution rate for
retirement, used by many employers, is
woefully insufficient and ill-fitting for most U.S.
households. The 3% rate is only appropriate
for 7% of households, and no single default is
appropriate for more than 8.8% of households that
need to contribute. The right answer isn't
a new default rate: It's a personalized analysis of
what each household needs. (See "Stop Guessing,"
by Morningstar researchers Thomas Idzorek,
David Blanchett, and Daniel Bruns, in the June/
July issue to learn how plan sponsors can
customize qualified default investment alternatives
to each participant.) Americans pay the price for
not having advice tailored for their needs. K
Stephen Wendel, Ph.D., is head of behavioral science
with Morningstar.
References
Bee, C.A. & Mitchell, J.W. 2017. "Do Older Americans
Have More Income Than We Think?" U.S. Census Bureau,
July 25, Working Paper.
EBRI and Greenwald & Associates. 2018. "Retirement
Confidence Survey."

Grinstein-Weiss, M. 2015. "How Prepared Are Americans
for Retirement: Written Testimony to the Special
Committee on Aging." Brookings, March 12.

Source: Morningstar.

gMultiple levers are available to improve
this outlook. We analyzed eight different
options and found that delaying
retirement, contributing more, and lowering
one's expectations for retirement, can be
tremendously
effective.2.5
0.0%

need contributions." We found that among older,
mass-affluent households (ages 45 to 60), asset
allocation is still the least impactful lever. Delaying
retirement and cutting one's expected standard
of living matter most, in the extreme. The financial
picture and most powerful tools to improve it
are actually quite similar for younger (ages 25-40)
and older populations, on average.

We also find that personalized advice is essential
66
to help Americans succeed:

5.0

gBeware of simple rules of thumb like "older people
64
need asset allocation,
and younger people
7.5
10.0

Huddleston, C. 2018. "Survey Finds 42% of Americans Will
Retire Broke-Here's Why." GOBankingRates, March 6.
Morrissey, M. 2016. "The State of American Retirement:
How 401(k)s Have Failed Most American Workers."
Economic Policy Institute, March 3.
Rhee, N. 2013. "The Retirement Savings Crisis: Is It Worse
Than We Think?" National Institute on Retirement Security.
Spiegel, J. 2018. "It's Time to Redefine 'Investor.'"
Forthcoming Morningstar research paper.
VanDerhei, J. 2015. "Retirement Savings Shortfalls:
Evidence From EBRI's Retirement Security Projection
Model." EBRI Issue Brief 410, February.
Table of Contents for the Digital Edition of Morningstar Magazine - August/September 2018
