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  • August 28, 2014

    Judith Ward Judith Ward, CFP®, is a senior financial planner and vice president of T. Rowe Price Investment Services.

    Retirement Exceeds Older Workers’ Expectations

    A new T. Rowe Price retirement survey of the recently retired and older workers found a sharp distinction between the two groups: Retirement actually is working out considerably better for the newly retired than older workers’ anxieties about retiring would suggest.

    The survey found that:

    • Only 29% of the retirees expect to work in retirement, but 57% of older workers anticipate doing so.
    • Only about a third of the retirees expect to reduce their standard of living in retirement, but nearly half of the older workers foresee that happening.
    • More than two-thirds of the retirees say they will have enough money to pay for health care, but only about a half of the older workers expect that.
    • Almost 57% of the retirees say they will live as well or better in retirement as when working, but only 33% of the older workers anticipate doing that well. (See chart for more survey findings.)

    “This is great news. Many heading toward retirement are usually anxious, less confident, and even a bit scared. To see the recently retired report such high satisfaction, at least early on, is terrific," says Judith Ward , a T. Rowe Price senior financial planner. “But overall, this is fantastic news."

    The online survey was conducted in February and March among nationally representative sets of working adults 50 years old or older who are contributing to a 401(k) plan or are eligible to contribute and who have a balance of at least $1,000 in a plan and of those who retired in the last one to five years and are deriving income from a 401(k) plan or a rollover individual retirement account.

    Those surveyed turned out to be a relatively affluent lot, underscoring the correlation between retirement savings plan participation and higher incomes and assets. These current and recently retired individuals had median household incomes of $100,000 and $58,000, respectively. Also, both groups’ median assets (less debt but including home equity) totaled about $470,000.

    Those levels of affluence are much higher than comparable data for all workers 50 or older and for all new retirees. Among all older workers, only 34% participate in workplace savings plans, according to the Employee Benefit Research Institute (EBRI).

    EBRI also has found that higher household income—as well as higher confidence about future retirement among older workers—is strongly correlated with retirement plan participation.

    And just as with the T. Rowe Price survey, EBRI has long found that retirees’ confidence in having financial security in retirement tends to exceed older workers’ expectations.

    Retiree Flexibility

    One reason for the gap between expectations and reality may be that retirees demonstrate agility and flexibility when it comes to managing their spending. The new survey found that:

    • Sixty percent of retirees prefer to adjust their spending, depending on financial markets, to maintain the value of their portfolios.
    • About nine of 10 adjust their lifestyles to fit their income, and almost as many say they don’t need to spend as much as when they were working to be satisfied.
    • About half say it’s not important to live as well as when they were working, and 69% say it’s not difficult to live without their preretirement paycheck.
    • About eight of 10 reduce their spending immediately if their spending exceeds their income.

    “It’s definitely important to have a retirement income plan; however, this shows that, like we do all through life, retirees are willing and able to adapt their spending and still be satisfied with their lifestyle," Ms. Ward says.

    Briefly

    A T. Rowe Price survey of current and past workplace retirement plan participants found that the newly retired:

    • Are enjoying retirement much more than older workers expect. Nine of 10 report being very or somewhat satisfied in retirement.
    • Tend to manage their spending dynamically, adjusting their lifestyles depending on financial markets and other factors.
    • Are replacing two-thirds of their income from all sources, with Social Security accounting for 43% of their total annual income. More than a third are working or looking for work.
    • Generally report more challenges if they are women living alone, because, on average, they have lower incomes and fewer investable assets. They also are more apt to be looking for work.

    At the same time, there is a significant gender difference in retirement:

    • The study found that women are more disciplined about managing their income and spending but have much lower incomes and fewer investable assets, particularly retired women living alone versus those living with a spouse or partner. Retired women living alone also are more apt to be looking for work.

    “The data suggest that single women, whether never married, divorced, or widowed, may be having a tougher go of it than their male counterparts. Women need to take an active role in being more financially aware and prepared for retirement," Ms. Ward says.

    More Findings

    The survey generated a range of other findings:

    • Asset allocation: Older workers allocated 47% of their investable assets to stocks; new retirees had more in cash and less in equities (38%) relative to older workers. Fear of running out of money may be fueling risk appetite as about four in 10 of both groups consider upside market potential essential.
    • Income: New retirees derive 43% of their income from Social Security; 19% still comes from traditional pensions. More than 60% don’t expect to use their retirement plan savings until they are required to at age 70½.
    • Only about half of new retirees have a savings withdrawal plan; among those who do, the median withdrawal rate is 4%. But only 19% very or somewhat closely follow the “4% guideline” recommended by T. Rowe Price financial planners—that is, withdrawing 4% the first year of retirement and adjusting that withdrawal amount by 3% to account for inflation each year.
    • New retirees say they have replaced an average of 66% of their working income (including Social Security).

    In all, nine out of 10 new retirees report they are very or somewhat satisfied with their retirement. All had been workplace savers. “So it is important to emphasize the likely role that a disciplined savings approach and access to a workplace plan has contributed to their satisfaction," Ms. Ward says.

    For more information about retirement planning, see troweprice.com/retirement

    For the Newly Retired, Retirement Turns Out to Be Not as Challenging as Older Workers Anticipate

    Copyright 2014, T. Rowe Price Investment Services, Inc., Distributor. All rights reserved.