Americans are on track to save 61% of their current income in retirement, according to Putnam’s latest Lifetime Income ScoreSM survey of retirement preparedness. The study also found that savings behavior, especially having a commitment to saving, remains among the top factors contributing to higher scores.
Putnam’s Lifetime Income Score, conducted with Brightwork Partners and introduced in 2011, calculates the income level that retirement savings plan households are on course to replace in retirement. The 2013 survey included more than 4,000 working Americans.
The score represents the percentage of current income the household was likely to replace, and includes projections for Social Security. For some households, scores exceeded 100.
Those with the higher scores shared these other characteristics:
- Have access to workplace savings plans
- Defer 10% or more of their income
- Work with a financial advisor
To determine the score, the study incorporated a range of factors including Social Security, defined benefit and defined contribution assets, and personal savings. In 2013, the calculation of scores began to incorporate factors of home equity, business value, inheritance, and the impact of mortality rates associated with as range of chronic health conditions.
Most households surveyed were also confident about the economy, but uncertain about retirement. A full 65% expect some economic growth in the year ahead and no recession. But 48% noted they are “not very confident” or “not confident at all” in being able to achieve their retirement income goal.
The Putnam Lifetime Income Survey, with research methodology provided by the Putnam Institute, was conducted online by Brightwork Partners and completed in January 2013. The survey of 4,089 working adults age 18 to 65 was weighted to U.S. Census parameters for all working adults.
IMPORTANT: The projections, or other information generated by the Lifetime Income Score regarding the likelihood of various investment outcomes, are hypothetical in nature. They do not reflect actual investment results and are not guarantees of future results. The results may vary with each use and over time.
The Putnam Lifetime Income ScoreSM represents an estimate of the percentage of current income that an individual might need to replace from savings in order to fund retirement expenses. This income estimate is based on the individual’s amount of current savings as well as future contributions to savings (as provided by participants in the survey) and includes investments in 401(k) plans, IRAs, taxable accounts, variable annuities, cash value of life insurance, and income from defined benefit pension plans. It also includes future wage growth from present age (e.g., 45) to the retirement age of 65 (1% greater than the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W)) as well an estimate for future Social Security benefits.
Our calculations also takes into account mortality rates for a variety of commonly diagnosed health conditions, including high blood pressure, high cholesterol, Type 2 Diabetes, cancer of any type, and cardiovascular disease of any type apart from high blood pressure. In addition, the model also takes into account the consistent use of tobacco on a household basis.
The Lifetime Income Score estimate is derived from the present value discounting of the future cash flows associated with an individual’s retirement savings and expenses. It incorporates the uncertainty around investment returns (consistent with historical return volatility) as well as the mortality uncertainty that creates a retirement horizon of indeterminate length. Specifically, the Lifetime Income Score procedure begins with the selection of a present value discount rate based on the individual’s current retirement asset allocation (stocks, bonds, and cash). A rate is determined from historical returns such that 90% of the empirical observations of the returns associated with the asset allocation are greater than the selected discount rate. This rate is then used for all discounting of the survival probability-weighted cash flows to derive a present value of a retirement plan.
Alternative spending levels in retirement are examined in conjunction with our discounting process until the present value of cash flows is exactly zero. The spending level that generates a zero retirement plan present value is the income estimate selected as the basis for the Lifetime Income Score. In other words, it is an income level that is consistent with a 90% confidence in funding retirement. It is viewed as a “sustainable” spending level and one that is an appropriate benchmark for retirement planning. The survey is not a prediction, and results may be higher or lower based on actual market returns.