How prepared are preretirees on their journey to retirement?
As the economic news continues to cause concern among some investors, Americans late in their careers may be among the most vulnerable to recent financial shocks. With the value of retirement savings and buying power shrinking at the same time, we wondered what kind of shape preretirees are in. See what we’ve learned and how the need for the personal help from a financial professional has grown.
Americans’ savings faced continued challenges in 2022
It was indeed a challenging year, with inflation, interest rates, and the markets all moving significantly in the wrong direction. As a brief sampler, the prime interest rate more than doubled, rising from 3.25% on January 3 to 7.50% on December 30.1 The stock market was volatile but down overall, with the S&P 5002 falling 19.4% in 2022.3 Then there was inflation, which eroded consumer buying power by 6.5%.4
Older workers may be especially vulnerable to all these changes, which shrink both nest eggs and the buying power of whatever money is left. To better understand the impact of the economy on our older retirement plan participants, we looked at plan and behavioral data for participants ages:
- 50–59, who tend to be transitioning from the years of balancing multiple major goals to focusing on retirement
- 60 and older, who are rapidly approaching their retirement years5
Overall retirement readiness hides the reality of older savers
For benchmarking purposes, we define a retirement-ready saver as one whose DC account balances, pension status, and projected Social Security appear on track to replace at least 70% of their preretirement salary in their retirement years. As of December 31, 2022, our nationwide retirement readiness score was 60.5%. But we know that the score can be skewed by younger workers, who have more time to save for retirement and, thus, more uncertainty baked into their numbers.
About half of plan savers 50 and older are falling short with retirement savings
The closer plan savers are to their normal retirement age, the less prepared they appear to be. In fact, just over half (51%) of participants age 50 to 59 appear to be on track to replace 70% of their income in retirement. The picture gets more challenging for people over 60, with 67% falling short of our readiness benchmark.
Income-replacement ratios for participants age 50 and older
Source: John Hancock internal data. Reflects open-architecture participant status as of 12/31/22.
Income planning based on expenses can help
An emerging in-plan measure—expected coverage of expenses in retirement—provides a second dimension for gauging a plan participant’s progress.
One of the big questions plan participants often ask is how much they need to save for retirement. The answer can become easier when we flip the question to, “How much might you spend in retirement based on the kind of lifestyle you’re aiming for?”
To make things simpler still, it helps to break it all down into a series of smaller questions, such as how much might be needed to cover essentials, nonessentials, and healthcare.
We looked at the people who used a John Hancock tool that does just this. Our retirement planner shows participants their projected retirement expenses in these three categories and how well their plan balance and other assets might cover their costs. Users can customize their projections with a selection of health and lifestyle variables, as well as information on retirement savings they hold outside of their current DC plan.
Of the more than 55,000 participants age 50 and older who’ve used the tool, just over half are projected to cover 80% or more of their future estimated retirement expenses, including 56% of those age 50–59 and 52% of those 60 and older.
Expected coverage of expenses in retirement for participants age 50 and older
Source: John Hancock internal data. Reflects open-architecture participant status as of 12/31/22.
As we consider the two sets above, it’s important to keep in mind that environmental factors may have had some effect on the status and projections for these workers. For instance, many retirement investors lost money during the market turbulence of 2022, which, in turn, could affect their retirement income. And across all our plans, 31% more participants reduced rather than increased their contributions over the course of the year.
Older participants leaving plans may benefit from guidance in how to withdraw their funds
No matter how much someone has saved for retirement, an informed transition out of a DC plan is important to help preserve retirement readiness. In a 2022 study, we found that among people age 60 and older who left their DC plans in 2001, 69% rolled their savings directly to an IRA or another qualified retirement plan. This means that more than 3 in 10 took their distribution in cash, potentially triggering income-tax liability, tax penalties, and a loss of future growth potential.
How participants age 60 and older took their money when leaving a plan
Source: John Hancock internal data. Reflects participants on our open-architecture platform leaving their plans from 1/1/21 to 12/31/21. Excludes accounts under $5,000.
Advice may be appropriate for, and welcomed by, participants approaching retirement
For DC plan participants 50 and older, decisions about saving and the realities of risk can become even more important. Those who’ve fallen short of their retirement goals may need strategies and steps to help them do better. Those who’ve built sizable retirement assets may need help consolidating it (see note below), so they too can plan better.
In other words, retirement savers can benefit from guidance, regardless of their standing:
- 82% of workers at all income levels want to be more confident about their financial decisions.
- Although more people tend to work with a financial professional as they near retirement, only 38% of those over 50 have advisor relationships.6
The current situation provides a great opportunity for financial professionals and plan sponsors to reach out with timely advice and education. This can range from preretirement budgeting workshops, to investment guidance, to full-fledged income planning that includes personalized drawdown strategies.
Note on consolidation: As other options are available, such as leaving it in their old plan, rolling over to an IRA, or cashing out, participants are encouraged to review all their options to determine if combining retirement accounts is suitable for them.
1 “Bank Prime Loan Rate,” Federal Reserve Bank of St. Louis, 2/16/23. 2 The S&P 500 Index tracks the performance of 500 of the largest publicly traded companies in the United States. It is not possible to invest directly in an index. 3 “Wall Street ends 2022 with biggest annual drop since 2008,” Reuters.com, 12/30/22. 4 U.S. Bureau of Labor Statistics, 1/17/23. 5 All data is from our open-architecture platform. 2022 data reflects John Hancock’s 1,633,777 participants, 1,879 plans, and $92.8 billion in AUMA as of 12/31/22. 6 In November 2022, John Hancock commissioned our ninth annual stress, finances, and well-being survey with the respected research firm Edelman Public Relations Worldwide Canada Inc. (Edelman). An online survey of 3,825 workers was conducted between 11/29/22 and 12/14/22 to learn more about individual stress levels, their causes and effects, and strategies for relief. John Hancock and Edelman are not affiliated, and neither is responsible for the liabilities of the other.
The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made.
The projected retirement income estimates for your current John Hancock accounts, future contributions, employer contributions (if applicable), and other accounts set aside for retirement used in this calculator are hypothetical, for illustrative purposes only, and do not constitute investment advice. Results are not guaranteed and do not represent the current or future performance of any specific account or investment. Due to market fluctuations and other factors, it is possible that investment objectives may not be met. Investing involves risks, and past performance does not guarantee future results.
Participation in John Hancock Personalized Retirement Advice (Retirement Advice) is subject to plan availability and does not guarantee investment success. Investing involves risks, including the potential loss of principal. Fees for this service are based on a tiered schedule and vary by account balance. For more information, consult the Retirement Advice investment advisory agreement. John Hancock Personal Financial Services, LLC (JHPFS), an SEC registered investment adviser and affiliate of John Hancock Retirement Plan Services LLC (JHRPS), is the investment manager of the Retirement Advice program. JHPFS has selected Morningstar Investment Management LLC, a registered investment adviser and wholly owned subsidiary of Morningstar, Inc., to act as the independent financial expert (as defined in the U.S. Department of Labor’s Advisory Opinion 2001-09A) for Retirement Advice. JHPFS monitors Morningstar Investment Management’s performance. Morningstar Investment Management LLC is not affiliated with JHRPS, JHPFS, or affiliates. JHPFS acts as a fiduciary with respect to the management of Retirement Advice investments.
It is your responsibility to select and monitor your investment options to meet your retirement objectives. You should review your investment strategy at least annually. You may also want to consult your own independent investment or tax advisor or legal counsel.
There is no guarantee that any investment strategy will achieve its objectives.
MGTS-PS 423034-GE 04/23 423034. MGR0329232804293