“If you fail to plan, you’re planning to fail.” These words, from the immortal Founding Father Benjamin Franklin, have been recited countless times over centuries to inspire a thoughtful approach to our most important endeavors. Apparently, Ben Franklin, who knew a thing or two, felt that flying by the seat of your pants was unlikely to yield a successful outcome.
Few would quibble with this notion, but in our day-to-day lives, we sometimes fall victim to the extemporal pursuit of a goal. Perhaps we’re just so excited to move forward that we hastily bypass planning and jump in headfirst. Or maybe the task seems so daunting, that planning is scary and it’s easier to simply close our eyes and put one foot in front of the other. Unfortunately, some Americans are saving for retirement with their eyes closed and Ben Franklin would not approve.
DALBAR, Inc., a leading researcher in investor behavior recently studied 1,103 investors to gain insight into their retirement planning (or lack thereof). The study found that more than half (53%) had not developed a financial plan to fund their retirement in the last 5 years. Not surprisingly, most of those investors were do-it-yourselfers. The study found that 75% of investors with a financial advisor had developed a plan to fund their retirement in the last 5 years while less than a third (30%) of those without an advisor have developed a plan. Simply put, it’s uncommon for people to develop and maintain a retirement plan on their own.
This highlights a less talked about value of the financial professional. Advisors are looked to as a guide to the right investments and/or allocation, but an advisor’s value starts at a more basic level: helping one to answer “The 3 Fundamental Questions of Retirement Planning”: (1) where am I? (2) where do I want to go? and (3) am I on track to get there?
When considering the 3 fundamental questions, our current position is a natural place to start. To plan for a goal, we must first identify and understand our starting point. Our current position in our journey should be the easiest of the 3 Fundamental Questions to answer, and it is. In 2021 we are just a few clicks away from seeing any of our investment account balances. However, for some investors, identifying a starting point has been a non-starter in their retirement planning.
Working with an advisor should help to make the estimate more accurate, but the presence of an advisor increases the likelihood of having an estimate at all. More than 7 out of 10 individuals with a financial advisor have an estimate of what they’ll need for retirement while only 4.5 out of 10 DIY investors have identified a retirement savings goal. In summary, it’s uncommon for people to estimate their retirement savings goal on their own.
Twenty-two percent (22%) of investors do not have an estimate of what they will have saved at retirement. For these investors, they have not projected where they will be at retirement and therefore have little basis to determine whether they are on track or what changes to make. One can only hope that the answer to this question is favorable. If it is not, it will remain unchecked until the 3 Fundamental Questions of Retirement Planning are answered.
The third fundamental question is no different than the previous two in that the use of a financial professional makes an investor more likely to have an answer. Those without an advisor are 3 times more likely to not have an estimate of what they’ll have saved at retirement. Less than 10% of investors with a financial professional do not have an estimate of what they will have saved at retirement while 30% of do-it-yourself investors lack such an estimate.
Is it true that those who fail to plan for retirement are planning to fail? Or perhaps the more direct question is: will they fail? DALBAR’s Retirement Planning Study did not calculate a likelihood of retirement success for each respondent. However, respondents were asked about their overall satisfaction with their retirement savings and the study found that not knowing the answer to one of the 3 Fundamental Questions of Retirement Planning led to lower satisfaction with one’s future financial outlook.
Investors generally have some degree of satisfaction with their retirement savings, but few are very satisfied. In fact, investors are most likely to be “Somewhat Satisfied” but least likely to be “Very Satisfied.” More than a quarter of investors are “Very Dissatisfied” with their retirement savings, the second most common disposition.
The table below displays the satisfaction with retirement savings for all investors in the study (General Population) versus those who had unanswered Fundamental Questions of Retirement Planning, further segmented by those without the help of a professional.
What we see from the table above is that those with unanswered Fundamental Questions of Retirement Planning tend to be less satisfied in their retirement savings. This is not to imply causation because it’s a classic “chicken and egg” scenario where it’s unclear whether unanswered questions lead to dissatisfaction or if dissatisfaction leads to not pursuing answers. Regardless of which is the chicken, and which is the egg, those who are dissatisfied will have a hard time making meaningful changes without the answers to the 3 Fundamental Questions of Retirement Planning.
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