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Economic turmoil stirs retirement plans of young, old

Staff writer ▼ | May 3, 2016
Economic turmoil over the past eight years has reshaped the views of American nonretirees on how they will pay for retirement.
Retirement planning
Retirement   After a series of economic shocks
Those younger than 40 are more likely now than before 2008 to view savings and part-time work as major sources of retirement income, while nonretirees in their 40s and 50s are now less likely to say they will rely heavily on pensions and home equity.

In the years leading up to the recession, a majority of U.S. nonretirees the furthest from retirement - those aged 18 to 39 - expected individual retirement accounts, or IRAs, and other 401(k)-type retirement savings accounts to be a major source of retirement funds.

An average 57% in Gallup's annual Economy and Personal Finance polls from 2002 through 2007 predicted these accounts would be a primary foundation for them.

At the same time, 26% said they expected savings accounts to be a major source of retirement money, 26% named pension plans, 24% mentioned stocks or mutual funds, and 23% listed home equity.

Then came a series of economic shocks, led by the bursting of the housing bubble in 2006 and 2007.

Over the next few years, home values dropped by almost 30%, the Dow Jones industrial average lost more than 40% of its value, and the national unemployment rate doubled.

Since 2013, home values and stock prices have mostly recovered, and unemployment is back down to the 5% range. But many younger nonretirees who witnessed the turmoil may have decided that a savings account is the safest way to protect their earnings for retirement.

In four Gallup polls from April 2013 through April 2016, an average 37% of those aged 18 to 39 list savings accounts as a major source of retirement money, up 11 percentage points from the 26% who named it in the 2002-2007 polls.

Retirement savings accounts such as IRAs and 401(k)s are still the source mentioned most often, but the percentage naming retirement accounts has dropped from 57% to 51%.

Savings accounts are now a clear second among this group, and between 19% and 24% of nonretirees mention the five remaining sources tested.

For those closer to retirement, who may have a better sense of what their options for major sources of retirement income will be, there has been less change overall, and the biggest changes have been decreases.

Thirty-four percent of nonretirees in their 40s and 50s polled prior to 2008 expected pensions to be a major source of retirement income, but that has dropped to 26% in the polls after 2012.

Home equity was listed as an expected source of retirement income by 29% of nonretirees in 2002-2007 - the period when the housing bubble pushed average home values up by more than 30%.

But despite recent improvements in the housing market, only 22% in polling since 2012 have said they expect home equity to be a major money source during retirement.

Self-directed retirement savings plans such as 401(k)s and IRAs remain the top expected source for those between the ages of 40 and 59. Social Security has overtaken pension plans as the second most common expected source for this age group.

Overall, despite negative media coverage of the long-term viability of Social Security, both age groups of nonretirees have maintained or increased their expectations for relying on it.

A separate measure on the April poll asks retirees how much they currently rely on most of the same sources of income. Part-time workers are not included in Gallup's definition of retirees.

Combined Gallup polling on this measure from the last four years shows Social Security to be, by far, the most common source of retirement income for today's retirees, with an average 59% calling it a major source.

Though many U.S. companies have phased out pensions in favor of 401(k) accounts, 37% of retirees currently name pensions as a major income source, while 23% say the same for retirement savings accounts such as 401(k)s and IRAs.

As in the past, there are significant differences between retirees' reliance on various income sources and nonretirees' expected reliance on the same sources.

For example, 31% of nonretirees expect Social Security to be a major source of income when they retire, but 59% of current retirees say it is a major source for them.

And while 23% of current retirees list retirement savings accounts as a major source, 47% of nonretirees expect them to be.

Smaller gaps between retirees' experience and nonretirees' expectations are apparent concerning pensions, home equity, savings accounts and individual stock investments.