Mirror Image

For now we see through a glass, darkly. 1 Corinthians 13:12

When St. Paul wrote those words, he was trying to explain to the early Christians that we may not understand why things are the way they are today, because our perspective is clouded. That phrase, to see through a glass—a mirror—darkly, conveys a similar sense in today’s usage: a sense of an obscured or otherwise imperfect vision of reality.

For the very most part, those of us in the business of retirement plans look at the landscape and fret about things like the dismal rate of participation, tepid deferral rates, and inert asset allocations (see “IMHO: ‘Never, Ever’ Land” ). Heck, these days, you don’t have to be in the retirement plan business to wring your hands over the sorry state of retirement savings.

Equally discomfiting to me are the incessant recitations regarding how apparently oblivious retirement savers are about the looming financial disaster. And while “the industry” often comforts itself by noting that those who have taken the time to consider their situation are more confident than those who haven’t, I don’t get that either. Perhaps it is a veiled attempt to encourage participants to do some retirement/financial planning (“You’ll feel better if you do”), but from every objective statistic, it would seem to me that most, perhaps the vast majority of, participants should feel more concerned, not less, after contemplating their situation (one would hope concerned enough to do something about it).

Then we get reports like last week’s from the Fidelity Research Institute that suggest that a “typical” worker is on track to replace 58% of their pre-retirement income in retirement (see “Replacement Rate Assumptions Could Be Wishful Thinking”). From what I can discern, 58% is pretty good for typical (to their credit, Fidelity positioned it as a shortfall, not good news). I don’t know that the traditional replacement ratio bogey of 70% is valid (see “IMHO: An Inconvenient Truth”), but Fidelity’s findings would suggest that most aren’t so far off the mark that the gap couldn’t be closed with just a bit more effort/focus. That’s the good news.

The Fine Print

The “fine print” is where it all falls apart. Fidelity’s numbers aren’t drawn from actually looking at people’s balances/savings and comparing them with current compensation levels. Rather, for the most part, they are drawn from what participants report to them as expectations. Among those expectations of a typical household was an $18,000/year pension—from a traditional defined benefit plan. Now, traditional pensions are no longer typical, though they are more prevalent than one might glean from the news. Moreover, $18,000 pensions aren’t typical, either—certainly not outside the public sector (see “Saving While You Still Work”).

Basically, then, not only is 58% likely “short” of what will be required to provide a financially comfortable retirement, the “real” number is likely somewhat short—perhaps significantly short—of the reported 58%. In fact, much of the data in this and other surveys is drawn not from reality, but from participant perceptions of their reality. That may explain why we have expressions of participant “confidence” that seem misaligned with reality.

Ultimately, the concept of retirement security is so individualistic as to defy ready generalization. Our individual expectations are shaped by our past, our health, our careers, our families, our income, and certainly by our preparations for retirement—and the reality, when it comes, will likely be just as individualized. Still, we shouldn’t focus on the status of a typical saver, for there is no such thing. Nor should we rely on the sensibilities of a saver who may be saving what he or she can (or thinks they can), not what they should.

For now, we all see through a glass, darkly. But the time will come when what we’ll see—is all we’ll get.

- Nevin E. Adams