Guaranteed income, low debt and stable nest eggs drive retiree satisfaction

Affluent, comfortable and average retirees are likely to have guaranteed income from pension plans and personal savings

Retirees across the board are unwilling to spend down their personal assets. Instead, they prefer to maintain their nest eggs throughout retirement in case of unexpected needs. Getty Images

Guaranteed sources of income, low debt, a clear spend-down strategy and employer-sponsored retirement help are key drivers of retirement satisfaction and security, according to a new study

Retirees can be classified into five profiles – affluent, comfortable, average, just getting by or struggling – based on their financial status and spending behaviour, the Employee Benefit Research Institute’s Retirement Security Research Centre's study found.

The research institute, based in Washington, polled 2,000 retired US households aged 62 to 75 years old with less than $1 million in financial assets in September 2020.

Global pension systems were already under pressure because of ageing populations, near-zero interest rates and their impact on returns even before the outbreak of the Covid-19 pandemic, according to the OECD Pensions Outlook 2020 report.

Average retirees accounted for 28 per cent of total survey respondents in the EBRI study, comfortable retirees made up 22 per cent, affluent ones (19 per cent), struggling retirees (18 per cent) and those just getting by (12 per cent).

Affluent retirees, who own financial assets worth more than $320,000 and have an annual income above $100,000, have diverse sources of retirement income, such as defined benefit pension plans and personal savings, the research said. This group is mostly mortgage-free with no credit card and car loan debts.

The majority of affluent retirees reported that their standard of living either had not changed or had improved since they retired. They were the most satisfied with their retirement life of all the groups, according to the study.

Comfortable retirees, on the other hand, own assets worth between $99,000 and $320,000 and earn $40,000 to $100,000 in annual income, the EBRI research found. They had easily manageable debt and were more likely to say their retirement savings are sufficient or even above their needs and planned to grow, maintain or spend only a small portion of their financial assets in retirement.

Meanwhile, average retirees own financial assets valued at less than $99,000 and earn a yearly income of between $40,000 and $100,000. The majority of respondents in this group rely on defined benefit pension plan incomes along with social security for their retirement income.

Nearly half of all average retirees had credit card debt and almost as many had a car loan, the study found.

“Retirees categorised as affluent, comfortable or even average were found to be more likely to have a guaranteed stream from pension plans compared with struggling or just getting by retirees,” the EBRI said in the study.

The absence of access to lifetime income through a defined benefit plan plays a critical role in retiree outcomes

Employee Benefit Research Institute

“The absence of access to lifetime income through a defined benefit plan plays a critical role in retiree outcomes. This suggests employers should think carefully about how they can help participants translate their pool of defined contribution money into a pension-like experience,” the research added.

At the other end of the spectrum, just getting by retirees have low levels of financial assets and income, but more than half of them own mortgage-free houses. The majority reported no debt or easily manageable debt. However, social security is a major source of their retirement income.

Struggling retirees have low levels of financial assets (less than or equal to $99,000) and income (less than $40,000 annually), according to the research. They were more likely to rent rather than own their homes and have unmanageable debt, such as credit card and medical debts.

These retirees rated their health status the worst out of all groups and said they relied on social security to provide the bulk of their retirement income.

“The debt dimension appeared to be a key contributor to struggling retirees’ lack of satisfaction, anxiety and poor standard of living,” the research said.

“Some of those households must have wished to work longer than they did to pay down their debt, but they were likely to be prevented from doing so due to their health or other issues that were out of their control. For instance, just getting by retirees scored their retirement satisfaction considerably higher than struggling retirees, and a key difference between the two was that the former were far more likely to have paid off their home,” the EBRI said.

The study also found that retirees across the board were unwilling to spend down their personal assets. Instead, they prefer to maintain their nest eggs throughout retirement in case of unexpected needs, such as assisted living expenses, the research said.