Every quarter, Wells Fargo and Gallup publish an investor and retirement optimism survey designed to get a handle on what and how people think about their retirement prospects. Not surprisingly, the most recent results show the highest level of investor optimism in seven years. After a stock market rally more than five years in length, recency bias all but guarantees such a finding. We are hard-wired to expect that what is happening or what just happened will continue into the future.
However, the current levels of optimism remain well below pre-2008 recession levels. Behavioral science readily accounts for this finding too in that we are inherently risk-averse to a very high degree—we feel loss roughly twice as strongly as we feel a similar gain. The memories of major portfolio losses during the financial crisis remain remarkably fresh. As Karen Wimbish, director of retail retirement at Wells Fargo puts it, "Clearly, average investors have not forgotten their recession experiences."
Thus fully 60% of investors think it's wise to be cautious about investing in the stock market "because it protects people from possible market losses." Indeed, nearly a third (29%) of investors even "consciously avoid stocks in long-term investment accounts" and, on average, have only 38% of their retirement savings invested in the stock market (retirees have 33% in stocks; non-retirees 40%).
"The fact that nearly seven out of 10 say they choose stocks for their long-term investing is a good strategy for growing assets over time, and yet it's noteworthy that nearly a third actively choose to avoid stocks for long-term accounts. And, this active avoidance is even more pronounced for people with fewer assets—these investors could stand to gain in the market through a long-term, gradual investing strategy and they seem to know it but they think avoiding risk is more important," said Wimbish.
Taking their savings and Social Security income into consideration, a majority (69%) of investors say they are "highly" or "somewhat" confident they will have enough money to maintain their desired lifestyle throughout their retirement years, perhaps reflecting optimism bias. However, nearly half (46%) are "very" or "somewhat" worried about outliving their savings, including 50% of non-retirees and 36% of retirees.
The most obvious response to this predicament is to save more and to prepare to spend less in retirement, even though nobody wants to. Doing so makes a clear positive difference in how things work out. We tend to have an idealized but unrealistic view of what retirement will be like for us—travel, golf, leisure—without counting the costs, both literally and figuratively. None of us wants to save what needs to be saved to achieve the results we want and almost none of us do.
Sequence Factor
As I have written before in this space, after saving and spending, the other major financial factor affecting retirement success is the sequence of portfolio returns in the years immediately following retirement when withdrawals are being made from that portfolio to provide retirement income. A wide range of "safe withdrawal" research has shown unequivocally that poor real returns plus ongoing withdrawals over the first decade of retirement can readily lead to a retirement spending shortfall. Even if portfolio returns average out to an acceptable level in the long run, if poor returns and ongoing withdrawals deplete a portfolio before the "good" returns finally show up, financial disaster can and does occur.
Notwithstanding investors' fears about stocks and their own financial well-being, as well as sequence risk, most advisors and retirees use systematic withdrawals from a retirement portfolio diversified into stocks and bonds as their preferred retirement approach. And for those doing so, advisors typically utilize what has come to be known as the "4% rule," a rule of thumb based upon historical returns suggesting that it is possible to withdraw 4% of a diversified portfolio's assets annually, adjusted for inflation, with a roughly 95% probability of success over a 30-year retirement.
