Two new, but separate, studies by Vanguard and Merrill Lynch revealed evolving trends among retirees. Neither study shatters commonly held beliefs, but both do show that some differences between perception and reality exist.
The Vanguard study, “Retirement Income Among Wealthier Retirees,” looked to see how sources of retirement income have changed. The firm surveyed more than 2,600 households ages 60 to 79 with financial assets of at least $100,000. The researchers requested a complete inventory of income sources and wealth holdings and then asked about the amount and movement of withdrawals.
Lending support to current perceptions, 85% of survey participants received Social Security and 71% received pension income. These public and private income sources accounted for nearly half of aggregate non-housing wealth. Ownership of retirement accounts (e.g., 401(k) plans, IRAs, etc.) was also high, with 84% of respondents holding at least once such type of account.
Where things get interesting is the composition of non-housing wealth. Among the six groups that Vanguard segmented respondents into, Social Security recipients and pensioners received about 70% of their non-housing wealth from the two traditional retirement income sources. Among the other six groups, however, the proportion of total wealth from Social Security and pensions ranged between 18% (for business Investors, who were the most reliant on business income) and 32% for annuity investors (who were the most dependent on annuity income). Even those who are the most dependent on income from stocks, bonds, funds and similar investments—retirement investors and taxable investors—still depended on Social Security and pensions for about a quarter of their total non-housing wealth. In other words, while many retirees are not solely living off of Social Security and pension payments, the two sources still account for a significant portion of wealth and income for most retirees.
The Merrill Lynch study, “Work in Retirement: Myths and Motivations,” looked at the employment patterns of retirees as well as the expectations of pre-retirees. The firm surveyed 1,856 working retirees and nearly 5,000 pre-retirees and non-working retirees. Included in the group were 720 of the Silent Generation (age 69 to 89) and 1,781 Baby Boomers (age 50 to 68).
Almost half (47%) of retirees said they have worked or plan to work during retirement. Further breaking from commonly held stereotypes, twice as many retirees said “staying mentally active” was a top reason for working as those who said “the money” was a key reason (62% versus 31%). Earning extra income also trailed “to stay physically active” (46%) and “social connections” (42%) as key reasons. This said, the study categorized more than a quarter of working retirees (28%) as “earnest earners” who need the extra retirement income to pay the bills. The only group to exceed earnest earners in size was “caring contributors” (33%). Within this larger group, more than a quarter worked as unpaid volunteers.
The Merrill Lynch study also found that about half of working retirees took a break from employment after they retired. On average, these people didn’t work for about 2-1/2 years after retiring. When they did go back to work, the majority were employed part-time. Interestingly, retirees were also three times more likely to be entrepreneurs than those who were younger. The average “reengagement” phase lasts for about nine years before a person permanently retires.
From a financial standpoint, the two studies show the importance of carefully thinking about what retirement may look like before voluntarily entering this new phase of life versus making assumptions based on perceptions of what it will be like. Consider what your primary sources of retirement income will be and, if possible, delay claiming Social Security until age 70. Once in retirement, realize that opportunities continue to exist, including the ability to start a new career.
- A Key to a Lasting Retirement Portfolio – Keeping withdrawals from retirement accounts to less than 4% or 5% significantly decreases the risk of outliving your savings.
- Assessing Your Portfolio Allocation from a Retiree’s Point of View – A helpful case study by former AAII Journal editor Maria Crawford Scott about how a retiree should adjust her portfolio allocation to match her long-term needs. (PDF format).
- What Should the Retirement Years Be Called? – A recent story on NPR says the terms “golden years” and “silver years” should no longer be used, so what do you suggest? Tell us on the AAII.com Discussion Boards.
Only one member of the Dow Jones industrial average will report earnings: FedEx Corp. (FDX) on Wednesday. Joining FedEx will be six other members of the S&P 500: Adobe Systems Inc. (ADBE) on Tuesday; Jabil Circuit (JBL) and Red Hat (RHT) on Wednesday; Oracle Corp. (ORCL) on Thursday; CarMax (KMX) and Darden Restaurants (DRI) on Friday.
The Federal Open Market Committee will hold a two-day meeting, starting on Tuesday. Along with the release of the meeting statement, committee members will give their update forecasts. Federal Reserve Chair Janet Yellen will hold a press conference at 2:30 p.m. ET.
The first economic reports of the week will be the June Empire State manufacturing survey, May industrial production and the June National Association of Home Builders Housing Market Index, all released on Monday. On Tuesday, the May Consumer Price Index (CPI) and May housing starts and building permits will be featured. The June Philadelphia Fed Survey will be released on Thursday.
The Treasury Department will auction $7 billion of 30-year inflation-adjusted securities (TIPS) on Thursday.
Friday will be a quadruple witching day, meaning both option and future contracts will expire.
- From Saver to Spender: Managing Your Money in Retirement
- Achieving Greater Long-Term Wealth Through Index Funds
- The Three Pockets Approach to Investing
Optimism about the short-term direction of the stock market exceeded 44% for the first time since last December, according to the latest AAII Sentiment Survey. Both neutral sentiment and bearish sentiment continued to fall.
Bullish sentiment, expectations that stock prices will rise over the next six months, jumped 5.2 percentage points to 44.7%. This is the highest level of optimism recorded by our survey since December 26, 2013 (55.1%). The historical average is 39.0%.
Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, fell 4.2 percentage points to 34.1%. Though at a three-month low, neutral sentiment remains above its historical average of 30.5% for the 23rd consecutive week.
Bearish sentiment, expectations that stock prices will fall over the next six months, declined 1.0 percentage points to 21.3%. The drop puts pessimism below its historical average of 30.5% for the eighth straight week.
The spread between bullish and bearish sentiment (the “bull-bear spread”) widened to 23.4 percentage points. This is the largest bull-bear spread since December 26, 2013 (36.5 percentage points).
During the past three weeks, bullish sentiment has risen by a cumulative 14.3 percentage points and the bull-bear spread has widened by a cumulative 19.4 percentage points. Though both readings are high relative to what we have seen this year, they remain within the typical ranges recorded throughout the survey's history.
The record highs established by the S&P 500 index as well as rebounding prices among other groups of stocks, including biotechs and small caps, are likely playing a key role in boosting optimism among individual investors. Also helping are continued signs of economic expansion, the Federal Reserve’s tapering of bond purchases and low interest rates. Offsetting this optimism are concerns about elevated valuations, the pace of economic expansion, Federal Reserve tapering and frustration with Washington politics.
This week's special question asked AAII members how, if at all, they have recently adjusted their stock investing strategy. Slightly less than one out of every four respondents (23%) said they have not made any recent changes. Equal numbers of respondents (20%) said they have shifted more into large-cap or value stocks. About 13% of respondents said they have increased their cash allocations.
Here is a sampling of the responses:
- I am looking at value more than growth-oriented stocks.”
- “I continue to invest with the same asset allocation plan, regardless of whether it is a bull or a bear market.”
- “I stopped buying because everything is overpriced.”
- “No significant alteration, although I have taken some profits and kept the proceeds in cash in lieu of the present elevated level of the market.”
Bullish: 44.7%, up 5.2 points
Neutral: 34.1%, down 4.2 points
Bearish: 21.3%, down 1.0 points
Take the Sentiment Survey.
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