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Retirement shortfall risk

Participants grossly underestimate what they need to retire.

  • The average amount participants estimate they will need to retire is just $515,000.
  • The typical participant expects to earn 8% annually, even though, on average, participants have a third of their assets in conservative investments. They also do not see the underperformance of their assets as a major risk to their retirement.

Participants have a long way to go.

  • On average, participants have just $84,000 saved for retirement, even though for the average participant retirement is just 21 years away.
  • Nearly half — 46% — still view their retirement assets as savings, not investments

Women, in particular, may be underfunded.

  • On average, women have only $68,000 saved for retirement, and their shortfall may be even harder to overcome, given that they are generally more conservative than men, with only 33% of their assets in US or international stocks funds vs. 42% among male participants.
  • Women also feel less confident than men that their assets are aligned with their risk.

Asset allocations and risk tolerance

Personal risk tolerance levels often are not aligned with asset allocation.

  • 41% of the plan participants identify themselves as aggressive investors. But when asked how they would invest a hypothetical sum, more than a third — 36% — express a desire to invest conservatively. Their actual allocations to conservative choices (31%) like bond and money market funds — are also higher than would be expected from truly aggressive investors.
  • For investors who describe themselves as conservative, 43% have no idea how their 401(k) assets are allocated.

Participants believe the major risks to retirement are outside their control.

  • Plan participants view risk factors largely beyond their control — such as a market crash, inflation and Social Security cuts — as the greatest risks to their retirement.
  • International stock funds are seen as the riskiest asset class and are considered even riskier than REITs or commodities.
  • Bond funds are viewed as the least risky, ranked by participants as safer than money market and stable value funds.

  Participants have taken risk self‑assessments.

  • Risk assessments may be becoming more commonplace, as the youngest group of investors — Gen Y — are the ones most likely to have taken one.
  • For those who have done self-assessments, an overwhelming majority — 94% — view them as helpful.

Differences across the generational divide

Younger participants may be leaning too conservative.

  • Fewer than half (only 44%) of Gen Y investors, who have time on their side, consider themselves aggressive investors. Even among those who do, they pick a conservative option when asked to select a hypothetical investment.
  • More than half of the Gen Y investors (55%) consider 401(k) assets savings rather than investments — a higher number than those who take this conservative view among Gen X investors (only 42% consider their plan assets as savings) and boomers (44% of whom have this view).

Younger investors don’t recognize there may be a problem.

  • Gen Y investors have more than a third of their 401(k) assets (35%) in the most conservative investments — stable value, money market and bond funds. Their allocation is comparable to boomers’ average allocations (36%) to these types of funds.
  • Compared with other generations, more Gen Y investors (49%) are confident that their 401(k) assets are aligned with their risk tolerance. 46% of Gen X investors feel that way, and only 35% of boomers do.

Inflation ranks as Gen Y’s biggest concern.

  • When Gen Y investors were asked to assess the greatest risks to their retirement, inflation was cited most often (by 26%). Two factors within their control, not saving enough (18%) and not starting early enough (15%), rank much lower among Gen Y participants’ perceived risks.
  • Younger investors also have a lower estimate of what they will need to retire — averaging only $483,000 vs. boomers’ estimate of $500,000 — even though they hope to retire at a younger age than either Gen X or boomers estimate their retirement age will be.

Gen Y investors are more interested in investment services and products.

  • More Gen Y participants (68%) express interest in tools and resources to help them make investment decisions than do Gen X investors (64%) or boomers (60%).
  • More than half of Gen Y investors — 54% — are willing to have 401(k) decisions made for them, a much higher percentage than the 41% of Gen X and 34% of boomer investors who want such help.

This article was originally published by MFS in their 2013 Participant Pulse.