Impact of the Market Crisis on Retirement ... - Prudential Financial

Prudential’s Four Pillars of Retirement Series

Impact of the Market Crisis on Retirement Preparedness Americans are rebuilding their retirement savings, and considering guarantees to protect their future

Summary 1. Americans acknowledge that the market crisis has hurt their prospects for a secure retirement.

4. Likelihood to consider guaranteed investment products is high.

• Six in 10 express significant concern about their retirement savings and investments. Many are making immediate sacrifices to deal with the financial and emotional challenges, such as cutting back on spending (54%) and postponing retirement (41%).

• When presented with ideas for guaranteed investments products, three-quarters said a product with guarantees for lifetime income, protection of principal, and opportunities to lock in market gains would be important or nice to have as part of their portfolio.

• Eight in 10 reveal a need to start rebuilding their savings, and many show signs of re-evaluating their approach overall. In fact, more than four in five respondents say they wish they had been better protected, and that they are more cautious now than ever before.

• Two-thirds of Americans would be likely to pursue a solution that offered guaranteed income as part of an annuity—this number even includes those who have access to guaranteed income through other sources (e.g., Social Security or pensions).

2. Recovering from market losses will be a challenge, but most remain optimistic. • On average, respondents think they lost 30% of their assets as a result of the market turmoil. • In reaction to the crisis, 29% pulled some or all of their money out of equities in order to avoid further losses. Only 19% took the opportunity to invest more. Most, however, have made no sudden portfolio changes (52%). • While 38% think they won’t be able to grow back the money that they’ve lost in their workplace retirement plan, the majority are optimistic, saying they will “probably” (47%) or “definitely” (15%) recoup their losses.

3. Investors are becoming more conservative. • Self-reported data reveals that a year ago, on average, retirees and pre-retirees had roughly 61% of their investable assets in equities vs. today’s average of 50%. • Moreover, seven in 10 say that being too aggressive with your investments is riskier than being too conservative. This is in stark contrast to just two years ago when respondents were split evenly on this matter.

• If protected by such guarantees, seven in 10 said they would be likely to put money back into the stock market.

5. Many are feeling a greater sense of accountability, but advisors will play a critical role in helping consumers discover options for mending their investment portfolios. • Americans are paying more attention and want more control of their portfolios (at least for the immediate future). For some, this means using “me” as the number one source for guidance (48% today vs. 37% before the market decline). • Yet, two-thirds would still trust a financial professional for information and guidance on how to best manage their retirement savings and investments. • And for more complicated products, consumers still need and want to talk to advisors. In fact, 66% said their preference for learning more about guaranteed income would be by talking to a financial professional.

Impact of the Market Crisis on Retirement Preparedness Research Objectives

Profile of Study Participants

Half of Americans say the recent market downturn was the “worst economic time of their lives.” This study reveals how Americans are:

• The total sample focuses on Americans in the most critical retirement planning years, and those actually living in retirement.

1. Reacting to the impact of the crisis on their retirement prospects

• The data throughout this study are segmented by employed (n = 500) and retired (n = 501).

2. Planning to rebuild their retirement 3. Reconsidering tools and assistance required to be successful

GENDER

61%

About the Study

39%

• Prudential’s study polled 1,001 Americans during March/April 2009. • The survey was administered online and has a margin of error of ±3.1% at the 95% confidence level.

Male

Female

• Each respondent met the following criteria: – Age 45-75

AGE

33%

– Participates in a defined contribution plan

28%

– Has retirement savings of $100,000 or more – Primary or joint decision-maker on household financial decisions

19%

16%

2%

2%

45-49 50-54 55-59 60-64 65-69 70-75

INVESTABLE ASSETS

32% 16%

34%

14% 4%

$100K- $250K- $500K- $1M$250K $500K $1M $2.5M

Impact of the Market Crisis on Retirement Preparedness

$2.5M+

1

More than 8 in 10 Americans feel the emotional and financial impact of the market crisis Vulnerabilities have been heightened

Concessions are being made

• The good news is that despite the market crisis, only 5% feel “panicked.” Yet, the 59% who have “negative” reactions report portfolio losses of 36% on average. The challenge now is to take these negative consequences and start the process of rebuilding savings in time to provide for a comfortable retirement.

• More than half of retired and employed Americans say the market crisis has forced them to make concessions in their lifestyle.

• One-quarter of Americans feel powerless in that they “don’t know what to think about the downturn.” They also report significant portfolio losses, at 31% on average. Clearly, recovery is important for them, too. • Those “not affected” were either very smart or lucky, as 63% of their assets a year ago were not invested in equities, and their losses were limited to just 12%.

REACTIONS TO THE MARKET CRISIS Among Total

Self-reported portfolio losses Panicked

• They are spending less, postponing retirement, living modestly—all in an effort to save more money and rebuild their retirement security. • Half of Americans are behind in reaching their goals, so suffering market losses has led many to make immediate shifts in their behavior, with a renewed focus on protection and preservation. • Retirees are making the most significant concessions. In fact, nearly half are living modestly or struggling.

The impact of the market crisis on Americans’ financial stability Among Total

5%

54% Say that they’ve had to make concessions in their lifestyle Disappointed

36%

Among Employed 59% Negative

36%

52% Are behind schedule for their retirement savings goals

41% May need to postpone retirement 21% Have already postponed retirement Regretful

18% Among Retired

47% Are living modestly or struggling

2

Don’t know

24%

24% Don’t know

Not affected

17%

17% 12% Not affected

31%

Prudential Four Pillars Series

Retirement security is impacted by market forces as well as by investor choices and decisions Outside factors create hurdles to saving for retirement

Personal investment decisions can also pose challenges to retirement security

• In this environment, rebuilding retirement savings is challenging. Outside factors—such as market volatility, inflation, and rising health care costs— influence and maybe even limit the ability to grow savings. Americans recognize these issues as significantly “hurting” their retirement prospects at this point in time.

• Despite the turmoil, half of Americans have made no changes to their investments (52%). Among these individuals, many do not know what to do and “staying the course” may seem easiest. However, being successful in the future may require new approaches and strategies.

• Even in certain areas where Americans see some glimmer of hope, such as income growth and real estate, the negative reactions far outweigh the positive ones. • Employer contributions to 401(k) plans are clearly the factor that Americans see as most beneficial to their retirement prospects at this point in time.

• On average, three in 10 pulled money out of equities as a way of limiting further losses. However, they run the risk of missing out as a potential rebound begins. • Americans who felt negatively affected by the downturn were most likely to pull money out of the equity market—34% did so.

CHANGES TO RETIREMENT SAVINGS AND INVESTMENTS – LAST SIX MONTHS Removed all or some money from equities

THE FACTORS AMERICANS BELIEVE ARE IMPACTING THEIR RETIREMENT PROSPECTS

Invested more

Among Total

No action

Hurt Helped Your employer’s contribution to 401(k)

10%

42%

Your income growth

41%

28%

Your job security

15% 26%

Real estate value

44% 22%

Health care costs

60%

7%

Inflation

62%

7%

Government policies

67%

9%

Stock market

79%

10%


29%

34%

19%

18%

52%

48%

Among Total

Negative

25% 18%

57%

Don’t know

18% 20%

62%

Not affected

Based on reaction to the market downturn

3

The recession has been a wake-up call for most Americans Investors vow to be more cautious

But knowledge and confidence lag

• Prior to the market decline, employed Americans had been primarily focused on asset growth and accumulation. During the “boom” years, some thought very little about protecting their assets against potential market losses.

• Prior to the market crisis, 56% of retirees felt they had accumulated sufficient assets to last a lifetime. Today’s reality is that neither retirees nor those employed feel “very” confident their retirement savings will be enough.

• Today, more than four in five total respondents regret not being better protected and say that now more than ever they are more cautious with their retirement assets.

• While Americans understand the importance of making their money last in retirement, many may lack the experience and product knowledge to be successful.

• The market decline has inspired individuals to rethink their personal responsibility to plan for retirement, and to choose effective financial products.

• For example, among retired Americans who are very knowledgeable about financial issues, 41% are very confident their assets will last, compared to only 6% of retirees who have little or no financial knowledge. CONFIDENT THAT SAVINGS WILL LAST THROUGH RETIREMENT

FEELINGS ABOUT IMPACT OF MARKET CRISIS ON RETIREMENT SAVINGS Among Total

Very confident

“I wish my assets had been better protected from market losses”

Somewhat confident

15%

22% 56%

Strongly agree

42%

Somewhat agree

44%

86%

63%

55% 39%

“I am more cautious now with my retirement assets than ever before” Strongly agree

35%

Post-Crisis Employed

Pre-Crisis Post-Crisis Retired

Somewhat agree

48%

83%

IMPACT OF FINANCIAL KNOWLEDGE ON CONFIDENCE THAT SAVINGS WILL LAST THROUGH RETIREMENT % Very Confident

Based on Financial Knowledge

4

Employed

Very knowledgeable

35% 41%

Somewhat knowledgeable

19% 11%

Not knowledgeable

5% 6%

Retired


Investors are becoming more conservative Most are shying away from aggressive portfolios

Many are not quite sure of strategy

• The market turmoil has caused many to shift to a more conservative strategy. On average, only one in five expect their investment behavior over the next five years to be “more aggressive.” • In fact, today, 68% feel investing too aggressively is the greater risk, versus 50% two years ago. • More evidence of this shift to more conservative investment behaviors include the following points (not charted): – 52% say they hesitate to invest more in stocks and mutual funds right now despite future growth opportunity. – Assets held in equities declined from 62% a year ago to 50% today. – When pre-retirees did reallocate 401(k) assets, 9 in 10 moved to more conservative investments.

• Less than one in five employed Americans feel “very” confident about their investment approach for retirement. And many are not sure they’ll be able to grow back the money they’ve lost in their defined contribution plan—38% say “no” and 47% answer “probably” rather than a definitive “yes.” • Investors in and near retirement are searching for a cure. While being conservative for the interim may make investors feel somewhat safer, they may not achieve the growth they need nor have the income necessary to last throughout their retirement. • Retirees especially are looking for opportunities for growth. In fact, 73% say they are looking for new ways to grow their assets (not charted). Yet they do recognize a need to balance growth opportunities with principal protection. CONFIDENT IN MAKING THE RIGHT RETIREMENT INVESTMENT DECISIONS Very confident

ANTICIPATED INVESTMENT BEHAVIOR FOR NEXT 5 YEARS More aggressive

More conservative

Don’t know

18%

Somewhat confident

24%

Employed

24%

50%

26% 71%

Retired

17%

47%

36% Employed

WHAT IS THE GREATER RISK IN INVESTING FOR RETIREMENT? Too conservative

Retired

CONFIDENT THAT DC PLAN ASSETS WILL GROW BACK Based on employed Americans

Too aggressive

2009

32%

64%

68%

No 38%

Definitely 15%

2007

50%

50%


Probably 47%

5

Retirement income guarantees become more important in a volatile market Creating sufficient income while maintaining asset levels is a challenge

Investment guarantees to support future income become important

• One-third of retirees (32%) are funding their retirement primarily by drawing down their savings. For this population, preservation of assets may be challenged. Without a significant market recovery, they may deplete their assets sooner than expected.

• 42% have a positive opinion about investment products that offer guarantees as a means of helping to secure their future.

• Three in five employed Americans expect their primary source of retirement income will be their own personal savings. They have more time to catch up, yet few are confident they will be able to save enough and preserve accumulated assets in retirement (18%). • For both populations, financial knowledge has a significant impact on confidence in being able to meet critical retirement planning needs. HOW AMERICANS ARE SUPPORTING (OR EXPECT TO SUPPORT) THEIR INCOME NEEDS IN RETIREMENT Gradually drawing down personal retirement savings Employed

• Only 22% had negative feelings toward investment guarantees. • However, 36% did not know enough about these options to state an opinion. Education and advice are critical. • Close to one-third of Americans consider the most important guarantee to be a lifetime income guarantee.

ATTITUDE TOWARD GUARANTEED INVESTMENT PRODUCTS

Negative 22%

Among Total

Living primarily off of Social Security and/or pension, while preserving as much savings as possible

61%

Neutral 36%

Positive 42%

39%

Retired

32%

68%

WHAT DO YOU FEEL WOULD BE THE MOST IMPORTANT FEATURE FOR YOU TO HAVE IN MANAGING YOUR SAVINGS FOR RETIREMENT?

Employed Retired IMPACT OF FINANCIAL KNOWLEDGE ON CONFIDENCE IN MAKING THE RIGHT RETIREMENT DECISIONS % Very Confident

Based on Financial Knowledge

Among Employed – Savings and planning Retired – Generating income for life

Very knowledgeable

43% 46%

Somewhat knowledgeable

14% 21%

Not knowledgeable

4% 6%

Total

18% 24%

6

Guaranteed lifetime income from your retirement savings

31%

29%

Flexibility how and when you take retirement income

16%

15%

Guaranteed minimum annual income

17%

13%

Guaranteed income to a spouse after the retiree’s death

8%

13%

Opportunities for increasing guaranteed income amount by locking in market gains

7%

9%

Guaranteed protection of principal 6%

9%


More than 8 in 10 employed think guaranteed investment products could be a good fit for a portion of their retirement portfolio Guarantees viewed as a good fit • One in five are convinced of the importance of investment guarantees, saying it would be a “perfect addition” to their portfolio. A large majority say it would be at least “nice to have.” • Most would not seek guarantees for 100% of their portfolios. Typically, Americans say they would want to protect about 30% of assets. • The majority are willing to consider investment guarantees—approximately six in 10 say they would be at least somewhat likely to consider guaranteed products. Interest levels are high among employed Americans as well as retirees. • These guarantees are of interest even among those who feel ahead of schedule in saving for retirement or who already have other sources of retirement income. For example, 64% of investors with a pension are willing to consider guarantees for a portion of their non-pension retirement assets (not charted).

HOW CONSUMERS FEEL GUARANTEED PRODUCTS WOULD FIT INTO THEIR PORTFOLIO A perfect addition to my portfolio Nice to have in my portfolio

• Likelihood to consider guarantees appears to be equally high no matter which avenue presented to investors—whether it be directly through a variable annuity or within a 401(k) plan. • This interest in guarantees in the aftermath of the crisis shows investors are open to considering new product solutions and that many consumers appreciate the potential value of guarantees. • In fact, half said that in concept they would pay “extra” for an add-on to an investment product if it could guarantee income, growth, and protection of principal (not charted).

The protection of guarantees could steer investors back into the market • Many would consider venturing into the equity market again if guarantees were in place. • Guarantees would also encourage many to invest less conservatively to give themselves a better chance to rebuild their retirement savings.

61%

I don’t think I need it in my portfolio

32%

17% Employed

Retired

32%

29%

Percentage of portfolio for which investors feel guarantees would be appropriate

VEHICLES THROUGH WHICH INVESTORS SHOW LIKELIHOOD TO CONSIDER GUARANTEED FEATURES Among Total

Somewhat likely

Within a variable annuity

18%

43%

61%

As option in 401(k) plan

20%

39%

59%

As rollover of 401(k) assets

21%

40%

61%

HOW INVESTMENT BEHAVIORS MIGHT CHANGE IF PROTECTED BY GUARANTEED PRODUCTS Definitely Put some money in or back in the stock market 76% 19%

61% 13%

Probably Choose more aggressive investments with greater potential for return 63% 17%

49% 9%

57%

Employed


68%

54%

83%

Very likely

More scenarios for acquiring guarantees

14%

22%

48%

46%

40%

Retired

Employed

Retired

7

Advisors will play a critical role in helping consumers discover options for recovery Consumers take more control

Two-thirds still turn to their advisor

• After experiencing the market decline, consumers recognize a need to become more responsible for their own retirement planning.

• For more complicated products in particular, consumers need and want to talk to advisors. In fact, roughly two-thirds of Americans said one of their top choices for learning more about guaranteed variable annuities would be talking to a financial professional.

• Advisors are still critical; however, advisors face the task of rebuilding consumer trust. • While consumers typically do not blame advisors for the market downturn, trust going forward is an issue.

• A close second is the Internet, which in many cases would be used in preparation for meeting face-to-face with an advisor.

DEGREE OF TRUST CONSUMERS HAVE IN THEMSELVES AND THEIR ADVISOR FOR RETIREMENT GUIDANCE

Many would also consider using new or additional advisors

Among Total

Definitely

Somewhat

No

Me

58%

35%

7%

Financial Professional

28%

40%

32%

• Consumers may be less loyal to current advisors than they had been. For example, 78% said they would consider using a financial professional other than their own if interested in a guaranteed retirement income product that was not available from their current advisor. LEARNING MORE ABOUT GUARANTEED PRODUCTS Ranked as #1 choice

Ranked as #2 or #3 choices

Employed LIKELIHOOD TO SPEAK WITH AND PURCHASE FROM FINANCIAL PROFESSIONAL OTHER THAN THEIR OWN

Use Internet to research

Among Total

Not likely 22%

Very likely 17%

Somewhat likely 61%

8

Talk with advisor

38% 24%

26% 32%

64% 56%

Retired Talk with advisor Use Internet to research

44% 18%

24% 38%

68%

56%


Prudential’s Four Pillars of Retirement The Four Pillars of Retirement represent the foundation of retirement security today, from Social Security to the choices made in retirement. Prudential uses these pillars as a framework for research reports, press releases and other information about the retirement issues and challenges facing Americans today.

SOCIAL SECURITY

EMPLOYMENTBASED PLANS

PERSONAL SAVINGS

RETIREMENT CHOICES

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