Groundhog "Ways"

February 2 is the day upon which America turns its attention to Punxsutawney, PA (and what seems to be a rapidly expanding array of Punxsutawney Phil wannabes) to get a read on the duration of winter.

The theory, of course, is that if your local groundhog sees his (or her?) shadow when he/she emerges from his/her burrow, it will send him/her scurrying back inside, and with that action foretell six more weeks of winter, whereas no shadow portends a timely/early spring. However, like weather forecasters everywhere, Phil is often wrong in his predictions. Indeed, by some estimates (and going back to 1887) he’s only been right… 39% of the time (and since 1969, only about 36%[i]).

As complicated as it surely must be to accurately predict the end of winter, that at least is an event in the relatively near term. And one that (for Punxsutawney Prognostication, anyway) requires only the emergence from one’s burrow. Predicting retirement outcomes… well, that’s a whole other thing. 

Surveys routinely show that most Americans have not even tried to guess how much money they will need to live on in retirement, much less actually made an educated guess. In fact, according to the Employee Benefit Research Institute/Greenwald & Associates’ 2020 Retirement Confidence Survey, just over 4 in 10 (44%) have (ever) estimated how much income they and your spouses would need each month in retirement. That’s a pretty consistent finding from the RCS, which began asking that question way back in 1993.

Worse—and this data point was not in the 2020 RCS—when you ask how people had made some kind of assessment of their retirement income needs, a jaw-droppingly large percentage indicated they… guessed.

Guessing might well be deemed a superior approach than ignoring the matter altogether, but consider that heading toward “retirement”[ii] with no idea of how much you might need is a bit like going on a long trip in an unfamiliar vehicle with a fuel gauge that isn’t working—oh, and with no real certainty as to exactly where you’re going, or when you need to get there. 

Many allow themselves the luxury of postponing this focus for another day—ignoring two harsh realities. The first is that time is (literally) money—the longer it’s put off, the steeper the financial “hole” to fill. Second—and one that ignores several harsh realities of its own—thinking that date of “retirement” will be of our choosing.[iii] If nothing else, the events of the past year should serve as a fresh reminder of that point (see also 6 Things People Get Wrong About Retirement).

Several years back, the RCS asked individuals how much they need to save each year from now until they retire so they can live comfortably in retirement. One out of five put that figure at between 20% and 29%, and nearly one-quarter (23%) cited a target of 30% or more. Those targets are larger than one might expect, and larger than the actual savings reported by RCS respondents would indicate.[iv]

All of which brings to mind this question: Were the savings projections so high because so many workers didn’t do a savings needs calculation—or did participants avoid doing a savings needs calculation because they thought the results would be too high?

Or both?

Let’s face it, if you’ve never tried to figure out how much you’ll need to live in retirement, you may not live very comfortably in retirement. 

And you don’t need to consult a Pennsylvania groundhog to know that could make for a really long retirement “winter.” 

- Nevin E. Adams, JD

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[i] Which still seems to put him ahead of most local weather forecasts.

[ii] And we are all, one way or another, even if you want to just think of it as a time post-employment.

[iii] Fewer than half of the retiree respondents to the RCS retired “about when” they had planned, and only 6% later than planned. Roughly half—and this has been true through the long life of the RCS—retired earlier than expected.  

[iv] And considerably larger than the record high savings numbers reported in the Plan Sponsor Council of America’s Annual Survey.