From paycheck to purpose: Retirement unpacked

Christine Kashkari: Welcome to Season 1 of Better Vantage by Vanguard, a podcast series hosted by Custom Content from WSJ and Vanguard. I'm Christine Kashkari, your host for this series from WSJ Custom Programming. And with me today is my cohost, Joe Davis, global chief economist at Vanguard.

Joe Davis: I'm almost jumping out of my seat, Christine, because I'm really excited. No, it's a topic I think every listener is going to be going to be able to identify with. It's saving for retirement and perhaps more importantly, drawing down, you know, generating income in retirement. That's an issue I've talked about with my family, something I'm thinking about personally in the coming year. So what I'm really excited about today is I know these two guests personally and I know we're going to get some just amazing expertise that I think we can all benefit from.

Christine: Sounds great, Joe. In this episode we have Joel Dickson, global head of advice methodology at Vanguard, and of course, Fiona Greig, global head of investor research and policy at Vanguard. Fiona?

Fiona Greig: Great to be here.

Christine: Joel, good to see you.

Joel Dickson: Yes, good to be here.

Christine: So, Fiona, a lot of what we'll be talking about today really leans into the deep research that you've been doing at Vanguard on retirement crisis and retirement readiness. And you do have your most recent report. We want to talk about what your findings are and whether that gives you optimism or, you know, despair.

Fiona: Yeah, well, thanks for that. We have done a national assessment of retirement readiness. And, you know, basically, we estimate that 42% of Americans are on track for retirement. Now, what does that mean? It means that by the time you add up what people will have from Social Security and what they'll have from their private savings, will that meet their spending needs in retirement? And for 42% of people, it will. For the other 58, it won't.

And, you know, that doesn't necessarily mean that this is a crisis, though, because actually if you look at the median shortfall for the typical American, it's only about $5,000 a year. So that means, you know, this person might need to either downsize their home, or work a year or two longer, or rely on their families, or spend a little bit less, given what we project that they will have in retirement.

Christine: So this is for all Americans?

Fiona: That's for all Americans. The shortfall is for the typical American, given that the median person does have a shortfall. Now we've looked at this across a number of different dimensions. You know, for example, if you look at people who have access to a defined contribution plan, that person, the typical person there is ready actually. Or if you look at younger generations, we are seeing some progress in that readiness in part because of the expansion of access to employer-based retirement plans.

Joe: What I hope to maybe do in this episode is also, let's unpack a little bit that 58%, Fiona. So it sounds like it's, I don't know. I'm both, it's not as bad as perhaps I fear, but there's some wood to chop. What are some of the low-hanging fruit that you see, right? Because you're seeing across a huge data set.

Fiona: Well, I'll tell you a personal story. So, about 10 years ago, I was switching jobs and a friend of mine who's a financial advisor said, you know, Fiona, once you get settled, give me a call and, you know, we can talk through your new finances. So I did, and after about 20 minutes, he said, you know, Fiona, the good news is that your employer has autoenrolled you into the retirement plan. Check.

However, they've autoenrolled you at just 3%, so saving just 3% of your income. And based on our conversation, I think you can save more. And I was like, are you kidding me? I was saving like 8 or 9% in my job when I was earning less before. And it just goes to show, you know, this was one of the most important moments that mattered in terms of my savings trajectory.

If I look back, you know, I was in my early 30s, I had two kids under 4. I was moving cities, I was moving sectors. Like, the last thing on my mind was the fine print of the retirement plan, but it was the first thing on his mind. And, you know, we have access to all of this data, you know, 50 million investors at Vanguard. We have access to this data. And it turns out I'm not alone. So we can watch people switching jobs. We've watched many people switching jobs because we happened to administer their old plan and their new plan. And sure enough, we see most people are seeing an income increase, but their savings rate is declining as they switch jobs. And that's because either they've forgotten to enroll altogether; God forbid they were joining a company that didn't autoenroll; or, like me, they were joining a company that autoenrolled them in, but into a low savings rate.

And so this is just one of the frictions, Joe, in terms of, you know, what is the next frontier of how we need to innovate to make this retirement system stronger is really focused on these seams that happen in people's savings lives between jobs in this, like, it's an employer-based system, right? So it's the seams that matter.

Christine: I'm all for personal responsibility, but who are we basically educating?

Fiona: I think it's all levels, right? This is news you can use for the end investor, right? The end saver. Hey, watch out, you might make this mistake. I almost did, right? It's news for financial advisors. Hey, this is a moment that matters, where you can show up for your clients. You might not think that job switching is a big deal, but it's actually a huge deal in terms of that savings. And then thirdly, it's a really important “aha” moment for plan sponsors, meaning employers and even us as record keepers, right? Because now, what are we doing?

Well, we're innovating our enrollment process to try and help people maintain the momentum in their savings as they switch jobs. Because we know that this happens in the data. I mean, the typical person can have nine jobs over the course of their career. So unlike my dad, who had one job for 45 years, you know, autoenrollment and autoescalation works beautifully for him or for people who have one job. But if you switch jobs like most of us do, your savings rate can go like this.

Yeah, we estimated that it could take the toll of about a $300,000 difference in retirement wealth simply by virtue of the sawtooth pattern in savings.

Joe: That’s huge.

Christine: Joel, your circumstances are, so you have kids that are just recently in the workforce. So what kind of advice are you giving these new entrants to the workforce apart from the obvious like, you know, of course sign up for a 401(k), give the maximum if you can?

Joel Dickson: There is so much difference at different stages of people's working careers and so forth. One of the things that, the issues that I have, with often what's talked about in this space, people have a number in mind and what number do I need to get at, right? And it's a big scary number. How am I ever going to get there?

And honestly, I, you know, especially for like my kids, new to the workforce, they have their entire kind of adult lives to go. Their goals and objectives for themselves are going to change many times over time. So, you know, for folks like that, for my two mid-20s adult kids, fairly early in the workforce, get into the employer plan, save up to what the company matches, provides a match on in terms of the savings, right?

Fund an IRA outside of that, if you can, don't have revolving credit card debt, and have some source of money available if you need it for unforeseen emergencies.

Christine: Dad? *jokingly gesturing to Joel*

Joel: Yes, oftentimes that is the insurance policy, yes. But if you can do those things and then invest the money in a let's say a target date fund, appropriate asset allocation for longer term. But if you can do those things, you're pretty well set up for at least what could happen in the future.

Joe: Let's talk about the 20- or 30-year-old who could be listening on this podcast before we get to the retirement income issue, right. The closer to 50s, 60s.

Joel: I would say, you know, save early, just get the saving done.

Joe: Yeah, and compound.

Joel: Yeah, let the compounding and the savings benefits happen. And then secondly, to avoid the revolving high interest rate credit card debt that really, in most cases, it's just being used to finance consumption. Now I kind of think of good debt and bad debt. You know, student loan debt in many ways is a good kind of debt; if it is an investment in a mortgage, it can be, exactly and so forth. But revolving credit card debt that you're paying a high interest rate on, you know, is really just eating up your savings capacity.

Fiona: Can I add one asterisk on what you said? Because, you know, within that savings bucket, I think it's incredibly important to underscore that emergency savings, right? The sort of an initial tier of even just $2,000, I mean, it's extraordinary what we're seeing in the data in terms of how powerful that security blanket is in terms of protecting the long-term savings, right? So people who have just $2,000 in emergency savings, they are less likely to take withdrawals from their 401(k). They're less likely to cash out their 401(k) when they leave the job.

Christine: So, Fiona, let's talk about the other end of that spectrum, what you're focused on. And I know you talked about the silver tsunami and how this year is actually quite significant. Can you tell us about that?

Fiona: So we are in the silver tsunami moment, which means specifically 2025, this year, are what some are calling “peak 65.” So 4.2 million people turn 65 this year. Never before have so many people turned 65 in this country and not until 2050 will again so many people turn 65. So that just means that we are experiencing this extraordinary, you know, demographic moment, this baby boom bulge, right, in our country. That means that more people now than ever need retirement income. They are transitioning from that saving phase to that spending phase. And it's scary.

Joe: You both see so much behavior and so much data. If you think about, OK, what are the things that are just must-haves that maybe half the listeners or so know, and then we could get to some of the more advanced treatment, right, that perhaps more people won't know and could benefit.

Joel: I kind of want to highlight two things here. The first is: Know what your resources are, because oftentimes we just start talking about the financial portfolio, but you've got things like Social Security income, or if you're like my parents, they have some small pensions. All of this is kind of adding to, how do you finance the spending that you need? Because really, you know, many people think about the financial portfolio and drawing income from that as either being required, like there's required distributions at a certain age, and so it has to be taken out, or as a filler of a gap between the income I have coming in and what I want to do from a consumption standpoint.

So, you know, to me, it's a bit of an inventory. Too often we as an industry, and I also see people, you know, kind of talking about this individually, just talk about one side of the equation. Yeah, they're like, oh, I've got this much money. Is that going to last me?

Well, I don't know. How much income do you have coming in every month? And so how much of a gap do you have that you need to do? The other thing, though, that I would point to, and it's already come up in a couple of points in the discussion is that we always want to make this a very objective analysis of resources, and “Take this” and  “Do that.” Retirement income and people feeling sufficient or feeling good is very much an emotional reaction.

And it's about, wait, am I OK with this, or I'm worried I'm going to run out of money, or I'm worried I might have a long-term care expense in the future that I don't. So a lot of this to me is managing the emotions and doing kind of actions that give you more of that peace of mind.

Fiona, you mentioned the kind of $2,000 of emergency savings. Why is that so valuable? It's because of the peace of mind that it has conveyed that people just feel better. And so, in the retirement income context, in many ways, that means making sure you've got those things that matter most to you covered. And then thinking about, oh, OK, what risk do I have? You know and so forth.

But so I kind of think of it less tactical and more emotional. What is going to do the thing first that's going to give me the greatest peace of mind or the greatest confidence of me being able to meet what my definition of success is?

Fiona: Yeah. I mean, we've asked people a very simple question, which is, you know, do you see yourself as an investor? And we were actually somewhat surprised to see that most of our clients don't. Indeed the first and foremost financial identity that kind of resonates with them is as a saver.

So to Joel's point, right, that even just the idea of spending down this money that you spent your entire lifetime saving is probably one of the scariest things to do. And also it's something you have to do at the moment at which your financial life is at its most complicated moment, right? You have these small pots strewn across the earth or at these different employers, Social Security, how do they all add up?

So in some sense, a first-order opportunity is consolidate and simplify, right? Help people understand what they have. And, you know, we started to look into, what are people actually doing with their money once they retire by watching them for five years after they leave a job at 60+. And it was so interesting. I mean, we can't get inside their minds, right? We're just looking at the data, but we see these three things.

So number one: Half of people take some withdrawals over the course of the five years, but they're lumpy, they're kind of all over the place. So that opportunity there is, ooh, is this a sustainable withdrawal rate? Second group of people, about a quarter, don't touch the money at all. Now that group of people, we don't know whether they're just too scared or they don't know how much to spend or whether they're not quite ready. They may not be fully retired and they may not need the money. And then the third group of people cash out entirely in the first year.

Christine: Wow.

Fiona: Now we're really concerned about that group. We talked about first-order opportunities, right? We’ve got to help that group of people realize the benefit of leaving that money invested for longer and not cashing it out, not thinking, oh, my retirement party means I get to pull all my money out and keep it over here. They may not be spending it down all in that first year. But even pulling out of the market is a missed opportunity.

Joe: Joel, is there any opportunity either for the plan sponsor, maybe the individual investor because they can do it all on their own, or even policymakers should they be listening, anything that comes to mind there for some of those opportunities?

Joel: We have default investment options in the retirement plan community. We don't have those in IRA areas, or at least not easily done. And so what we see then in the data, yet another form of leakage, is that when folks roll over from a plan into an IRA, on average, what's the number, Fiona?

Fiona: So 28% of people leave it in cash for seven years or longer. And it's disproportionately younger investors who make this mistake, people who have lower balances and also women, right? So people who have the longest investment horizons and need this money the most, they're the ones who are suffering from this cash drag the most.

So that's where public policy can play a huge role, right? Why in 401(k) land can I automatically invest this money in a target-date fund? But over here in IRA land, it's the same financial goal. It's sitting in cash.

Joe: And I think for anyone who's listening to the podcast, that'd be the first thing just to ensure.

Joel: Yeah, go check your IRA.

Joe: I think there's a lot to unpack here, right? Anything that we didn't touch upon today that we should have, right? That you would say, you know what? We missed this topic for our listeners.

Joel: I think I would just emphasize, I really think retirement is more of a planning problem or issue than it is an investing issue. There are investing issues involved, but it's a planning problem. It's about the emotions. It's about how do you kind of take the resources that you have and craft those into what looks like success for you.

If you haven't saved, it doesn't matter what your asset allocation is. 1000% return on zero dollars is still zero dollars, right? So it's a saving and planning problem that needs to be addressed.

Fiona: What are the key decisions people even feel that they are making? And if the real decisions that they have been making are around saving, not investing, then that's the conversation that's relevant to them. And, you know, I think about this in part because there's some evidence that, you know, 70% of widows fire their financial advisor when their husband dies. Now that number ought to be tested because it sounds alarmist, right? But it raises questions, right, about not only who we're serving, how we're serving, and also just what kind of conversations we're having with our advisors or within the family, right?

Like I think about my parents, I'm having some of the most honest conversations I've ever had with them about money. Are they going to have enough? What's important to them, you know, where do they want this money to go? And that's a personal conversation that's really important.

Christine: We covered a lot of ground in terms of retirement readiness, but if there's one key takeaway that you want our listeners and viewers to come away with after this episode that they can do right now for themselves, for their household, what would that be?

Fiona: I would say, save for retirement in the 401(k) plan. Take advantage of that match. Make sure you don't have any cash in your IRA. Those are low-hanging fruit. And start a conversation with your parents or your spouse.

Christine: Joel?

Joel: I'll let Fiona have the last word on that.

Joe: Ditto. Absolutely.

Joel: Plus one.

Christine: Thank you. Thank you so much, Fiona. Thank you, Joel. Thank you for joining us. We are looking forward to our next episode in this series.

Joe: Indeed, indeed.

Christine: If you enjoyed this episode and found it helpful, subscribe and share.

Disclosures:

All investing is subject to risk, including possible loss of principal. Diversification does not ensure a profit or protect against a loss. 

Withdrawals from a Roth IRA or 401(k) are generally tax-free if you are over age 59½ and have held the account for at least five years; withdrawals of earnings taken prior to age 59½ or five years may be subject to ordinary income tax or a 10% federal penalty tax, or both. (A separate five-year period applies for each conversion and begins on the first day of the year in which the conversion contribution is made.) 

Target-date investments are subject to the risks of their underlying funds. The year in the investment's name refers to the approximate year (the target date) when an investor would retire and leave the workforce. The investment will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. A target-date investment is not guaranteed at any time, including on or after the target date.