Balancing Flexibility and Security in Retirement

  • Our Global Retirement Reality Report (GR3) captures people’s hopes, fears, expectations, and experiences surrounding retirement. 
  • This 2018 survey spans eight countries, with 9,500 respondents at various stages of their retirement journey. 
  • Here, we will focus on retirement income solutions, specifically, how people plan to make — or are making — savings last in retirement.

Setting the Stage: The Spectrum of Defined-Contribution (DC) Dependence

The eight countries surveyed are at varying stages of DC dependence, defined here as how central to saving and long established DC schemes are in a given  marketplace. Countries that are less DC dependent are in the transition from a defined- benefit (DB) model toward a structure that puts more retirement readiness responsibility on the individual. Countries that are more DC dependent have been oriented around an individual saver structure for decades. We also use this spectrum to highlight key plan dimensions by country.

*DC schemes can be introduced in Germany only if they are negotiated as part of a collective bargaining process, and they must by managed jointly by the social partners (trade unions and employers’ organizations). The details of the scheme are defined by the social partners. This includes whether to auto-enroll members, mandate contribution rates, etc. Policy makers in Ireland have published a “Roadmap for Pensions Reform,” which includes details on a new automatic enrollment savings system. Source: “A Roadmap for Pensions Reform,” Government of Ireland, February 2018.

We find that workers in the more established DC systems have a greater sense of ownership, engagement, and certainty when it comes to their savings plan, while those in less dependent DC systems are not yet fully confident in the new structure. Respondents’ sentiments around savings schemes add an important dimension to their overall feelings of retirement satisfaction — an angle that we will explore more deeply in additional, research-related content. 

Expectations Meet Reality

People’s expectations of their financial needs in retirement appear to be fairly realistic, from what they will make to how they will spend it to where they may have to make sacrifices. This consistency suggests an accurate assessment of the path ahead, particularly when it comes to the alignment around income replacement rates.

When Awareness Doesn’t Translate into Action

However, while people know what they will need in the future, achieving expected income levels in retirement at current savings rates may present challenges, as the majority of respondents say they are saving less than 10% of their income.

For those who are saving on a pure DC basis, net state pension, Social Security, or other income sources, the potential for outliving retirement savings given a less than 10% savings rate is high. In the current market environment, a participant who saves 10% of their salary from age 25 to 65 could expect to receive a replacement rate of about 30% of their salary at retirement.1 This should give individuals and providers around the globe pause to consider course corrections.

 Changing Behaviors

 People are living longer than ever, and the rising generation seems to understand the need to adopt new behaviors in order to enjoy a comfortable retirement. Such changes include a new approach to working — working longer and differently in order to builder greater financial security. Trends reflected in the annual Willis Towers Watson Global Workforce Study suggest that younger workers are increasingly focused on cultivating professional experiences defined by meaning and strong  relationships,2 dimensions that can arguably sustain employees throughout a longer, more engaged working life. When seen together, these positive signs point to a public adjustment to the new demographic reality of longer life spans.

Changing Needs

While saving earlier and working longer are ways to prepare for an adequately funded retirement, managing those funds to last a lifetime remains a critical issue for both workers and retirees. The majority of workers worldwide agree, saying they would value an employer-offered, predictable income solution in retirement.

Younger workers are the most interested, likely because they currently save through an employer plan and have come to connect retirement savings to the workplace.

When asked their preferences on how they would like to access assets in retirement, respondents had three options:

1. Security: A stable retirement income that lasts for my life, even if it means I lose flexibility and cannot change the amount I receive from month to month.  

2. Flexibility and security: Flexible access to part of my retirement savings in the early years of retirement and use of the remaining portion for stable income in later years.

3. Flexibility: Flexible access to my retirement savings, even if that means the savings might run out before I die.

 Not surprisingly, the option that offered the best of both worlds — flexibility in early retirement plus predictability in late life — was the leader. 

The next generation of individuals and systems is reimagining what retirement looks like; in leaving behind strategies limited by “or,” we are embracing       those defined by “and” — best exemplified by the consistent, global desire for flexibility and security.

1 Byrne and Reilly, “Investing for Retirement in a Low Returns Environment: Making the Right Decisions to Make the Money Last,” Pension Research Council Working Paper, September 2017, PRC WP2017.

Forbes, "Do Millennials Think Differently About Money and Career?" September 17, 2013.

The views expressed in this material are the views of SSGA Defined Contribution as at April 30, 2018, and are subject to change based on market and other conditions.

This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance, and actual results or developments may differ materially from those projected.

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Exp: July 31, 2022