Economy

A Shift in How Americans Plan to Fund Their Retirement

by Dennis Jacobe, Chief Economist

Future retirees expect less from Social Security, more from 401(k)s, part-time work

PRINCETON, NJ -- While only 3% of current retirees say part-time work is a major source of their retirement income, one in five future retirees expect to use part-time work as a major source of their retirement funding -- twice the 10% who had the same expectation in April 2001.

The major income sources supporting today's retirees tend to reflect how Americans have traditionally funded their retirements. Pensions play a major role, with 33% of current retirees saying this is a major income source for them, as does Social Security (56%) -- which was often figured into pension program designs. Of course, U.S. companies have been shifting away from pensions and to tax-deferred investment accounts for some time; this is also reflected in the income of current retirees, with one in five pointing to these accounts as a major income source. Similarly, as home values have increased during recent years, home equity has become an added major source of income for some of today's retirees. Significantly, few current retirees count on part-time work as a major source of their retirement income.

In sharp contrast, those who have yet to retire have expectations for their future sources of retirement income that are markedly different from the sources current retirees depend on. For example, far fewer future retirees -- only 31% -- expect to rely on Social Security, possibly fearing that it cannot be maintained at its current funding levels. Fewer (26%) also expect to use company pensions, most likely because of the new reality that fewer and fewer companies are providing such benefits today.

On the other hand, nearly three times as many future retirees (54%) plan to rely on their tax-deferred investment accounts to fund their retirement, compared with current retirees who rely on such accounts (20%). Similarly, significantly more future retirees also plan to rely on a variety of sources such as their home equity, savings accounts/CDs, and stocks/stock mutual funds than is true for current retirees.

One in Five Americans Expect to Work in Retirement

Probably the most stunning difference between current retirees' income sources and future retirees' expectations for those sources involves part-time work. While only 3% of current retirees say part-time work is a major source of income, 20% of future retirees expect it to be a major income source in retirement -- twice the 10% who had the same expectation in April 2001.

One reason those who have yet to retire are looking to part-time work as a major source of retirement income may be the generally better health of many Americans as they reach retirement age. These relatively healthy older Americans may want to stay active doing something they enjoy, and simultaneously adding to their ability to live comfortably in retirement. However, another, possibly more likely, reason that an increasing percentage of future retirees anticipate working part-time involves the numerous economic trends indicating that they may not be able to retire and live comfortably without working.

Commentary

In a Wells Fargo/Gallup Small Business Index survey conducted in October 2007, 40% of small-business owners said they plan to continue working until they are forced to stop for health reasons, and another 47% said they intend to cut back on work but always maintain some involvement in their business. Many also noted that they intend to retire later than they had previously planned and that financial pressures are one reason they are doing so.

The willingness of many future retirees to entertain the idea of working part-time in retirement is particularly interesting when seen in context with the avowed preferences of today's small-business owners. Many older Americans may want to delay their retirement or work part-time just like their small-business-owner counterparts because they are healthy and enjoy what they do and perhaps also because of today's difficult economic environment. The question may be whether they will have that option or even be encouraged to do so.

Given the current pressures on the Social Security system, it seems as though finding opportunities for future retirees to work part-time or even delay retirement might be a win-win situation for the federal government, business, and future retirees who are hoping that part-time work will be a major source of retirement income for them that will help them enjoy a comfortable retirement.

Survey Methods

Results are based on telephone interviews with 1,021 national adults, aged 18 and older, conducted April 6-9, 2008. For results based on the total sample of national adults, one can say with 95% confidence that the maximum margin of sampling error is ±3 percentage points.

For results based on the sample of 310 retirees, the maximum margin of sampling error is ±6 percentage points.

For results based on the sample of 711 non-retirees, the maximum margin of sampling error is ±4 percentage points.

Interviews are conducted with respondents on land-line telephones (for respondents with a land-line telephone) and cellular phones (for respondents who are cell-phone only).

In addition to sampling error, question wording and practical difficulties in conducting surveys can introduce error or bias into the findings of public opinion polls.

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