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PERSONALIZING RETIREMENT PLANNING
December 15, 2022 | 8 Minute Read
Michael Moran
CFA, Senior Pension Strategist
Michael Moran
Christopher Ceder
Senior Retirement Strategist
Christopher Ceder
Key Takeaways
- Today’s working individuals have to maneuver through a range of competing financial priorities and life events, balancing short-term financial needs and long-term financial responsibilities.
- Retirement planning needs are unique for everyone, impacting generations and genders differently.
- Technology is transforming personalized goals-based solutions to better meet the wide range of individual retirement savings needs.
Despite innovation in corporate-sponsored retirement plans, such as target date funds and automatic enrollment, many individuals are still struggling to fully prepare for their retirement. Most retirement experts suggest that individuals should have 70% or more of their pre-retirement income annually as a target for their retirement income. But according to our Retirement Survey & Insights Report 2022, 75% of retirees do not reach this goal, and have insufficient income to maintain their pre-retirement standard of living. Additionally, more than 50% of working Boomers and Generation X report being behind schedule, highlighting that they might be headed for a similar situation.
To support these evolving needs, new technology platforms are emerging as an important tool to help individuals maximize retirement savings. With this data-driven approach, plan sponsors are able to offer a personalized retirement savings strategy based on each individual’s changing needs and situation.
The Financial Vortex: A New Reality for Retirement Saving
The transition from corporate defined benefit plans to defined contribution plans over the last few decades laid the foundation for the growing complexity we now see in preparing for retirement. Coupled with shifts in healthcare plan costs to employees (i.e., high-deductible health plans or coinsurance) and growing expenses (i.e., college costs, mortgages, and student loans), retirement savers need to balance short-term financial needs and long-term financial responsibilities. This confluence of competing financial priorities is the “financial vortex” of challenges that workers need to navigate. These issues were limited for Boomers due in part to the prevalence of pensions, but the generations that have followed are having to choose between saving for retirement and other financial obligations, with often limited guidance or recommendations based on their unique needs.
Competing financial priorities can significantly impact a worker’s ability to save for retirement. Comparing generations, we can see how differently each group is affected by these factors. Relative to working Boomers, Generation X is where we start to see competing financial priorities having a larger impact on retirement savings; however, Millennials and Gen Z most strongly feel the effect of various other financial responsibilities (i.e., monthly expenses, financial hardships or time out of the workforce) on their ability to save for retirement. For example, 14% of working Boomers said saving for college impacted their retirement savings while 67% of Millennials said the same. We saw that 38% of working Boomers said that caring and financially supporting family members impacted their retirement savings, while 79% of Millennials said the same. These differences highlight the shift that has taken place: today, retirement saving cannot be done in isolation and needs to account for the personal circumstances people face. Plan sponsors can look to offer services to support the unique challenges of their employees across generations and offer a personalized path to retirement.
Additional headwinds face women saving and preparing for retirement. On average, women earn 21% less lifetime income than men, and have an average of nine years less earned income, often due to caregiving which takes them out of the workforce and affects their Social Security benefit amounts.1 They also have to prepare for nearly three years longer life expectancy than men, on average.2 These factors put more pressure on their retirement finances, and we see from the survey that women report being impacted by more financial factors than men. To that end, it may not be surprising that four in five women respondents reported receiving less than the target 70% pre-retirement income in retirement, and women reported more stress (61% vs 52% for men) and less confidence in their ability to manage their retirement savings (47% vs 68% for men).
Financial Responsibilities Impacting Retirement Savings, By Generation
Source: Goldman Sachs Asset Management. As of October 12, 2022. Survey participants were asked to select responses based on what has extremely, very, moderately, slightly or no impact on their ability to save for retirement. We are reporting extremely, very and moderate responses.
Financial Responsibilities Impacting Retirement Savings, By Gender
Source: Goldman Sachs Asset Management. As of October 12, 2022. Survey participants were asked to select responses based on what has extremely, very, moderately, slightly or no impact on their ability to save for retirement. We are reporting extremely, very and moderate responses.
Our report further shows how retirement savings for workers and retirees may be impacted differently by the financial vortex. Only 25% of retirees in our survey reached retirement with 70% of their pre-retirement income, and more than half have less than 50% of their pre-retirement income. Many workers nearing retirement are on a similar path, where about four in ten working respondents feel their savings are behind schedule. Here we also see a disparity across generations, with Boomers and Generation X feeling the furthest behind and Millennials and Gen Z most likely to report that their savings are ahead of schedule. Additionally, 65% of Gen X respondents are stressed about managing their retirement savings as they face a tumultuous macroeconomic backdrop with time to close the savings gap narrowing. The generational difference highlights that as one progresses through different stages of life and career, it may be difficult to keep retirement savings on track.
Retirement Savings Status
Source: Goldman Sachs Asset Management. As of October 12, 2022.
Given the growing impact of the financial vortex on different generations and genders, the appetite for help is very strong, as 95% of working individuals said financial guidance and advice would help them successfully manage their retirement savings. Financial advisors, along with employer sponsored retirement plans, are viewed as the top sources of education. Supporting individuals with personalized education and advice, along with a dynamic retirement savings plan, can better align their retirement strategy with their individual circumstances. This can also help reduce the effects of the financial vortex before it is too late.
Personalized, Goals-Based Technology
Many employer retirement plans offer a singular path to retirement intended for an average plan participant whose retirement savings are assumed to be on track. However, this path is not an individualized strategy and therefore may not meet individuals where they are. In some cases, these plan features are designed to get individuals started and break the inertia of not saving with the expectation that individuals will personalize their retirement strategy later. But data-driven technology in plans can now incorporate significantly more inputs about the participant.
Technology can personalize the retirement savings experience by identifying things like an individual’s retirement income goal based on their salary, target retirement age, spousal information, and employer contributions and assess how they are tracking towards that goal by considering current savings accumulated, rate of future savings and outside savings accounts, if applicable. From an investment perspective, personalization can better align the asset allocation strategy to take more investment risk to close a retirement savings gap and less investment risk if the individual is on track or projected to meet their goal. The objective is to increase the likelihood that the individual achieves their needed savings amount. Combined with an engagement strategy that includes personalized communications and ongoing status updates, technology can help plan sponsors provide participants greater confidence about retirement security.
As individual circumstances unfold, another benefit of a technology-based solution is that it can recalibrate the individual’s retirement asset allocation and contribution strategy to dynamically account for these changes. This type of solution can also keep the strategy aligned towards their individual retirement goal using unique data points specific to their circumstances (e.g., salary changes). Given the importance of investment compounding to retirement savings, leveraging technology to recalibrate can help maximize the amount of time the adjustments can work towards closing any retirement savings gap or reducing investment risk to keep existing savings.
CASE STUDY
A Personalized Path to Retirement
As retirement savers experience events that pull their savings off track, a more personalized retirement planning experience can help support their goals.
1. Getting a Late Start
Twenty-nine year old Liam recently changed jobs and cashed out his retirement account upon switching to his new employer.
Liam no longer has any retirement savings due to his cash-out and, as a result, he needs to contribute a higher amount and seek more investment growth to reach his personal retirement goal.
2. College Expenses
Liam, now 45 years old, is a single parent who had to pause his retirement savings to pay for his two children’s college education.
Liam’s retirement savings fall behind schedule because of a pause due to life events. A personalized goals-based solution can provide him with an asset allocation that seeks to take additional investment risk relative to the standard age-appropriate portfolio to help close the gap.
3. Market Growth
At 57, Liam is in the later stage of his career with significant retirement savings. Due to market growth, his savings are now ahead of schedule.
Due to recent market appreciation, Liam’s accumulated savings are now ahead of schedule relative to his retirement savings goal. A personalized goals-based solution can automatically recalibrate his investment portfolio to reduce risk and help improve the likelihood of meeting his retirement goal.
Alternatively, if the market had a correction and his savings fell behind, the personalized, goals-based investing approach would recalibrate the investment portfolio to increase portfolio risk to help achieve his retirement goal.
Goals-Based Investing Can Provide a Personalized Path to Retirement
Source: Goldman Sachs Asset Management. These examples are for illustrative purposes only and are not actual results. If any assumptions used do not prove to be true, results may vary substantially.
As people face competing financial priorities and complexities as they plan for and live in retirement, one-size fits all solutions are becoming less adept at addressing their unique needs. We believe modern retirement plan design should consider individual needs, helping participants solve the challenges they uniquely face and supporting multiple paths to retirement.
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