Retirement Security: NIRS’ Dan Doonan on What’s New

NIRS – the National Institute on Retirement Security -- is a nonprofit, nonpartisan research and education organization dedicated to retirement security. NIRS continuously produces insightful research and is shifting to look closely at some new areas, including costs associated with life in retirement.

We talk with Executive Director Dan Doonan about some of what he’s learned in 2020, and Dan shares four fresh pieces of research with us. Four!

Dan, tell us about NIRS and some of your current priorities.

In many ways, NIRS is a think tank for retirement security. We produce research that looks at how people are doing in preparing for retirement and how people feel about retirement -- Is there a crisis? -- public opinion work. As researchers, we don't lobby, but we do talk about broad ideas we see as essential to improving our retirement systems.

We've also worked on retirement system best practices. Recently, we have been focusing on costs in retirement where in the past, we've focused more on retirement income. So, we are thinking about things like healthcare and long-term care costs and how they impact seniors and how that's likely to change over time.

Home ownership is one of those elements too. Our recent report looked at home ownership trends. There's a slight slip in home ownership, but also more people are carrying mortgages into retirement. Having a mortgage paid off as you retire is a great “retirement hack”. It lowers your costs instead of just having to have more income.

In May you published a piece on women and retirement security, Still Shortchanged.  What did you learn in that work?

Unfortunately, there weren’t a lot of surprises in this refreshed view. We see that the wage gap follows women into retirement. Whether it's through a savings-based plan or a pension with a final pay formula, that pay gap continues to have an impact when women retire. Divorce also has a big impact financially for both men and women, and that surfaces in the results.

In the recent report we also took a look at caregiving, whether it be for kids or parents or other family members, and how that impacts a woman’s financial readiness for retirement.

As we've found in earlier reports, racial disparities are pretty stark in retirement resources, just as they all are in overall wealth. Another thing to note: younger retirees seem to keep things afloat by continuing to earn some wages in early retirement. But that declines as they get older. It means a higher proportion of women in the oldest age groups tend to be more likely to be in poverty or near poverty. And that often follows the death of a spouse and after facing high health costs or institutional care costs. So that's an area where we think expanded Social Security minimum benefits would really provide a lot of help at the older age groups.

We know you don't lobby -- are there some policy ideas that come out of your work.

Yes, most of our reports offer considerations for policy. We talk about a minimum Social Security benefit increase. We talked about caregiver credits in the women's reports and the idea there is this gap; credits would counteract some of this missed time in the workforce so that it’s less financially harmful to women who take time off to do that important work.

You took a look at the growing burden of retirement focused on rising costs and increasing risk and uncertainty for folks. How meaningful did you found savings start dates to be?

I think a lot of us understand the importance of starting to save early. We took a look at the outcomes of starting early, and starting later, including what happens with contributions and investment returns when you get a late start. Short story – you want to be the saver on the left, not the right.

If you start saving at age 40 instead of age 25, and you work until age 65, you'll accumulate about half the amount of retirement savings. That's probably not surprising. What might be surprising is that you'll still make 80% of the total contributions, but you miss out on 60% of the investment returns.  Your pay tends to be higher in the later years in your career so you're making most of the contributions, but you're losing the extra years of investment return.

You never get to those late years where you have a large balance and it really starts to grow for you.

And that leads me to two observations: One is having access and strong participation levels at early ages -- it's just really vital to making a do-it-yourself retirement system work well. And two, the economic efficiency of retirement systems that lack investment risk pooling is severely hampered by these late starts. And that's a bit troubling. I know in the millennial report we found about two-thirds of millennials haven't started saving. And I think that illustrates that we're really missing out on the efficiency if we continue to see so many lack access to workplace plans early in their working life.

You’re reinforcing access combined with automatic enrollment. Until about age 50, retirement savings is not what many people are thinking about.

The charts in The Growing Burden show this impact, which you can see in the charts, what portion of the nest egg is cumulative contributions vs. cumulative investment returns. With that late start, you will see the big impact on asset growth over your career. Timing is everything, right?

We also looked at the impact of the last five years of returns in a retiree’s account. That’s going to vary from one person to another, but the last five years' returns really drove a person’s resulting level of retirement assets. We have less control over that, but I think it's important we look at these kinds of projections to keep reality in mind -- one person might retire near the top of a bull market and another person can retire in a 2009 low interest rate recession.

You can control over whether you start early. You can’t control what happens to markets and interest rates in that last five years before retirement.

Yes. As you approach retirement, you also are often advised to back off how aggressively you're investing. Target date funds will automatically do that for you, for example. But if that's your investment strategy, then you shouldn't assume seven percent earnings for all years, you should assume that returns are reduced as you approach retirement. High late-career return assumptions really make the projections look good, but we need them to be realistic.

Good point. Switching gears, is there an intersection between the work of NIRS and the work of the states for private sector workers?

Yes, I think so. We do a lot of work for retirement readiness overall and I'm very optimistic about the state-run programs that have been built and are being proposed. Both workers and firms seem to appreciate this is being done for them, not to them. In my mind, that's a testament to building a well-run system that's user friendly. At the end of the day, we're talking about basic financial services. But it does take time for smaller firms to establish and run plans themselves. This new approach picks up where existing systems aren't covering everyone. It really helps fill access and participation gaps.

Dan, what haven't we asked that is important.

Let me share some other thoughts about the state-run systems. I think a lot of the programs have nice features that take into account a broader understanding of not just retirement, but in general, what keeps people on track financially. There's been courage to set up the default savings rates at an impactful level – 5% generally.

We don't want to default people into something they can't handle, but we also don't want to set the bar of 2%, because people look for guidance – is that what should I do? So I think it sends an important message. And if they need a different rate, people can change their savings levels to a rate that realistically might work for them. I think it's encouraging to have systems that acknowledge retirement isn't going to be cheap in the future. The programs include automatic savings escalation. And I think that's important.

There's talk of the federal government building a wraparound for the states that haven't been moving forward. So I think that'll be interesting as well.

Thank you Dan! We have to ask - do you have any favorite pandemic silver linings?

I do. Our family is spending a lot of time together. And we got a pandemic puppy. We probably wouldn't have been around enough to onboard a new puppy. We talked about calling her Silver, for Silver Lining, but decided to name her Cheddar. So I'd say time with kids and Cheddar are our big silver linings.

Cheddar!

#pandemicpup

#silverlining

Dan – we love it! Dan Doonan is the executive director of the National Institute on Retirement Security along with a team that includes Tyler Bond, Research Manager, and Nicole Dascenzo, Membership. With the Board of Directors, Doonan leads the organization’s strategic planning, retirement research and education initiatives. Check out NIRS’ wealth of research and insights here. Follow Dan and NIRS on Twitter: @NIRSonline and on Facebook at /NIRSResearch. And you can reach Dan directly here.

This piece was featured in the November 5, 2020 edition of Retirement Security Matters. For more fresh thinking on retirement savings innovation, check out the newsletter here.