Retirement Funding Sources Differ for Current, Future Retirees

GALLUP NEWS SERVICE

PRINCETON, NJ -- Gallup's latest update of its annual survey on the Economy and Finance continues to show a disconnect between Americans' retirement income expectations and the realities for those who have already retired. Non-retired adults are most likely to expect their 401(k), IRA, Keogh, or other retirement savings account to be their major source of retirement income. On the other hand, retirees are most likely to say they rely on Social Security as a major source of income. Non-retired adults' expectations for how they will fund their retirement vary by age and income.

Retirement Expectations for Non-Retirees

The poll, conducted April 10-13, asked non-retired adults whether they expected 10 different income sources to be their major source of income, a minor source of income, or not a source of income during their retirement.

Personal investment accounts such as a 401(k), IRA, Keogh, or other retirement savings plans top the list of expected income sources. Nearly half of non-retired adults (47%) say they expect this to be a major source of income. Among non-retired adults, no other income source mentioned in the survey comes close to the percentage mentioning personal investment accounts.

Roughly one in four non-retired adults say they expect the equity in their home (26%), a work-sponsored pension plan (26%), or Social Security (25%) to be major income sources in retirement. Fewer than one in five expects their regular savings accounts or CDs (19%), individual stocks or stock mutual funds (19%), or part-time work (18%) to be a major source of income.

At the bottom of the list are annuities or insurance plans, mentioned by 7% as a major income source, money from inheritance, also at 7%, and rent and royalties, at 6%.

In recent years, the trends of expected retirement income sources for non-retired Americans have varied only modestly.

Expected retirement income sources differ significantly by household income groups. The vast majority of non-retirees in high-income households (those making $75,000 or more per year) say a 401(k) or similar type of savings account will be a major source of retirement funds. For non-retired low-income earners (those in households making less than $30,000 per year), Social Security is most likely to be cited as a major source, though only 39% do so.

Non-retired adults in high-income households are significantly more likely than those in low-income households to cite a range of investments as major sources of retirement income, including: 401(k) or similar accounts (72% vs. 20%); stocks or mutual funds (32% vs. 8%); home equity (33% vs. 15%); and regular savings accounts or CDs (27% vs. 13%). Higher-income respondents are also much more likely to expect work-sponsored pension plans to be a major source of retirement income (36% vs. 11%).

In contrast, non-retired adults in low-income households are more likely than those in high-income households to expect Social Security (39% vs. 11%) and part-time work (25% vs. 9%) to be major income sources.

The results also vary by age group. Non-retired adults under age 50 are much more likely to say a 401(k) or similar type of account will be their major income source in retirement than any other possible source, while those aged 50 and older are equally likely to say a 401(k) type of account or Social Security will be a major source.

As the table shows, non-retirees at different age levels vary on four specific income sources:

• Non-retired adults under age 50 are more likely than those aged 50 and older to say a 401(k) will be a major income source.

• Non-retired adults between the ages of 18 and 34 are twice as likely as those who are older to say other savings such as a regular savings account or CDs will be a major income source.

• Americans aged 50 and older who are not retired are more likely than those who are younger to expect Social Security to be a major income source.

• Non-retired adults between the ages of 18 and 34 are slightly less likely than older non-retired adults to say a pension plan will be a major income source.

Retirement Experiences of Retirees

The actual sources of income that retirees report relying on differs substantially from the sources non-retirees expect to use. The majority of retirees, 55%, say Social Security is a major source of income to them right now. This is followed by a work-sponsored pension plan, mentioned by 36% of retirees as a major income source. Following further down the list are home equity (22% say this is a major income source), and 401(k), IRA, Keogh, or other retirement savings accounts (21%).

At the bottom of the list are regular savings accounts or CDs (14%), individual stocks or mutual funds (10%), annuities or insurance plans (8%), rent and royalties (5%), part-time work (3%), and money from an inheritance (3%).

Retirees' current income sources have not changed much since Gallup first starting measuring them in 2002.

The differences between retirees' experiences and non-retirees' expectations may be attributable to the fact that retirees are relying more on Social Security than they anticipated and that non-retirees underestimate the extent to which they will need Social Security. However, it is more likely that the differences merely reflect recent changes in the way Americans fund their retirements. Many companies are moving away from providing pension plans to employees and instead offer 401(k) plans as a way to help them save for retirement. Such retirement plans have only existed in the last few decades, and they have grown in popularity in recent years. As such, older Americans may not have had the opportunity to participate in a 401(k) plan at all, and if they did, they may not have had sufficient time to build up a large nest egg in them.

In addition to the movement toward 401(k) plans, there is also much discussion about the future solvency of the Social Security system. Previous Gallup polling shows that many younger Americans do not expect to get any Social Security benefits at all when they retire. If the system survives for the long term, it is probably that future benefits would have to be reduced in some way.

Survey Methods

Results are based on telephone interviews with 1,005 national adults, aged 18 and older, conducted April 10-13, 2006. For results based on the total sample of national adults, one can say with 95% confidence that the margin of sampling error is ±3 percentage points.

For results based on the sample of 702 non-retired adults, the maximum margin of sampling error is ±4 percentage points.

For results based on the sample of 303 retired adults, the maximum margin of sampling error is ±6 percentage points.

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.