New York, NY - June 2009 - A significant percentage of university and college employees are delaying retirement forcing higher education leaders to devise new ways to manage retirement patterns on campus.
At a recent TIAA-CREF Institute Fellows Symposium entitled “Managing Risk in a Market Meltdown” the TIAA-CREF Institute presented the latest results of an ongoing tracking study* that measures the impact of financial market developments on retirement planning. The study of TIAA-CREF investors age 50 and older, conducted in March 2009, reveals:
- Just under four in 10 (37 percent) say they have delayed their planned date of retirement, up from 33 percent in February 2009 and from 28 percent in October 2008 when the study began
- Roughly the same number say they have changed how they plan to live in retirement compared with 29 percent in February 2009
- Many survey respondents report they are changing their retirement savings behavior; 38 percent reported changing their investment allocations, compared with 28 percent in February 2009 and 19 percent in October 2008
TIAA-CREF Institute Fellows, senior university leadership and TIAA-CREF executives explored this and other challenges raised by the dramatic drops in financial markets including managing retirement portfolio risk, retirement savings adequacy, consumption patterns in retirement, non-financial barriers to retirement, and ways to strengthen employee retirement accounts at the Symposium. “A goal of this TIAA-CREF Institute Fellows Symposium was to identify lessons being learned through the financial crisis that might suggest changes to financial education efforts, communications materials or financial products or services,” said Madeleine d’Ambrosio, Vice President and Executive Director, TIAA-CREF Institute.
Are we prepared for retirement? Possible flaws in retirement preparedness research.
Varying views on evaluating financial preparedness for retirement were discussed. While traditional media report only about a quarter of baby boomers will be prepared financially for life after they retire, a growing line of research indicates that the baby boom generation may be better prepared than conventional wisdom suggests.
Speaker, Karl Scholz, Professor of Economics at University of Wisconsin – Madison, presented the research findings behind the TIAA-CREF Paul A. Samuelson Award-winning paper, “Are Americans Saving Optimally for Retirement?” Scholz maintained that there is not in general a retirement savings crisis, though the current market downturn has worsened the existing state of affairs. Rather, Scholz suggests that commentators may be using the wrong yardstick to measure retirement preparedness. He noted that replacement ratios are a commonly used financial planning tool, but are problematic when used to assess whether people are saving enough. They tend to indicate that people are doing a poor job preparing for retirement. This is important, Scholz explains, because if people feel their retirement savings goals are unattainable, they simply may not try to reach them.
He argued that rule-of-thumb replacement rate targets (e.g., 70 – 85% of pre-retirement income) can yield an inappropriate high standard for households to meet. One reason is that simple percentage targets ignore consumption patterns and don’t recognize, for example, that adults with children will need fewer financial resources in retirement to maintain their standard of living once children are out of the house, since they consumed a smaller share of total household resources during the years children were in the household. Using instead a lifecycle model, Scholz concludes that savings is adequate for maintaining the living standards in retirement for most American families.
Scholz advocated more useful, practical, and therefore effective financial planning advice and guidance incorporating rigorous yet tractable financial planning rules-of-thumb.
Understanding and communicating investment risk
Speaker Thomas Rietz, Associate Professor of Finance at The University of Iowa, posed the question of how the risk should be presented to individuals investing for retirement. Rietz explained that people do seem to understand the concept of investment risk and to care about it, but need an environment that makes the risk they face more salient to the outcome they will achieve. His research indicates that the right information presented the right way has the ability to create such an environment and improve the choices made by investors. Rietz raised the possibility of laying out for investors the entire distribution of investment outcomes, not investment returns.
Speaker Elizabeth Jetton, Principal, RTD Financial Advisors, said not enough attention is paid to cash flow management. “Financial planning boils down to helping people resolve the tension between what I need and want today and what I will need and want tomorrow. It is as simple as that,” Ms. Jetton said. Research shows people are concerned about the return they will get from their investment, but do not focus on the risk, which has a large impact on long run returns, Jetton explained. She also added the element of timing of returns to the discussion, emphasizing the importance of understanding that there is very little, if any, predictability regarding the timing of returns or the timing of events in one’s life. The challenge in planning effectively is to focus more on what can be controlled (what a person saves and how long he or she works) versus what cannot be controlled (investment returns).
Managing and Facilitating Employee Retirements
According to the National Institute on Aging, the average number of years a person can expect to live has nearly doubled in the past century and some predict that people will continue to live even longer, making the customary retirement age of 65 unrealistic.
With more campus employees postponing retirement and uncertainty about the future, higher education leaders are examining new ways to manage employee retirement patterns, including:
- Early retirement incentive programs with clear goals and targets
- Coverage of healthcare expenses during retirement. TIAA-CREF recently introduced a potential solution, The Retiree Healthcare Savings Plan, a voluntary employer-sponsored defined-contribution savings account that offers a tax advantaged way for employees and retirees to accumulate funds to pay for future medical and health expenses
- Increasing employees’ base salaries or giving instructors fewer courses to teach in exchange for an irrevocable declaration that they will retire within a certain time period
- Allowing faculty who reach 70 to continue being a member of the intellectual community; e.g., senior faculty members stop drawing a salary but retain their office, participate in seminars and teach courses
- A pay -for-performance system that allows rookie faculty to earn more than tenured faculty if requirements are met
- Buying back tenure from older faculty members with a lump sum cash payment
- Offering online communities for retirees. For example, TIAA-CREF created www.myretirement.org last year – one example of providing individuals with an outlet to talk with other retirees about financial issues as well as travel, family and living in retirement
A transcript from the Symposium is available upon request.
*Approximately 220 to 240 TIAA-CREF investors have been interviewed by telephone each month between October 2008 and March 2009. Over 1,300 investors have participated since the research began. Data will be updated in the future on a quarterly basis.
TIAA-CREF is a national financial services organization and the leading provider of retirement services in the academic, research, medical and cultural fields with more than $398 billion in combined assets under management (9/30/08). To learn more about TIAA-CREF, please visit www.tiaa-cref.org.
About the TIAA-CREF Institute
The mission of the TIAA-CREF Institute, part of TIAA-CREF, is to foster objective research, build knowledge, support thought leadership, and enhance understanding of strategic issues related to higher education and lifelong financial security. For additional information regarding the TIAA-CREF Institute, please visit www.tiaa-crefinstitute.org.
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