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PUTNAM INVESTMENTS | putnam.com
In 2011, Putnam Investments introduced the Lifetime Income ScoreSM, a tool
for helping households estimate the level of income that they are currently on
track to replace in retirement, in partnership with Brightwork Partners. Scores
incorporate numerous variables related to earnings through employment,
as well as financial behavior and confidence in financial decision making. The
result is a tool that Americans can use — even early in their careers — to begin
measuring progress toward seeking a financially secure retirement.
After initially surveying 3,290 working adults between the ages of 18 and
65 in 2010 and early 2011, we have expanded and refreshed our research
with a follow-up survey, which we conducted using an online panel between
November and December 2011, and weighted results to U.S. Census parameters.
The 3,958 working adults between the ages of 18 and 65 who responded to
this survey confirmed a number of our initial conclusions regarding retirement
security in America: namely, that factors such as access to workplace retire-
ment savings programs and higher deferral rates have the most predictive value
in determining retirement preparedness.
Our latest survey also captures for the first time the potential contribution of
home equity and business ownership to retirement income. Furthermore, our
survey now contains a breakdown of Lifetime Income Scores by employment
industry, and demonstrates how asset allocation outside and inside qualified
retirement plans took a sharp turn in 2011 toward cash investments, primarily at
the expense of equities. Lastly, our survey includes important data on workers’
expectations for out-of-pocket health-care costs in retirement and provides a
snapshot of workers’ receptiveness to using health-care expense-estimating
tools in conjunction with retirement planning.
May 2012 » Perspectives
Lifetime Income Scores II: Our latest assessment of retirement preparedness in the United States W. Van Harlow, Ph.D., CFADirector, Investment Retirement Solutions
• Working Americans are on track to replace 65% of their working income in retirement.
• The distribution of Lifetime Income Scores has become more polarized, with fewer Americans in the middle and more at the bottom and the top — and with more going down than moving up.
• Deferring 10% or more to a workplace savings plan and using a financial advisor continue to have a major impact on retirement preparedness.
• For households that expect to add real estate equity or business value to their retirement income, scores increased from 75 to 85.
• Saving for health-care costs in retirement is gaining traction as a key investment objective.
Key
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MAY 2012 | Lifetime Income Scores II: Our latest assessment of retirement preparedness in the United States
A widening gap in retirement preparednessResults from our initial survey showed that the difference
in preparedness between the lowest-income earners
and the top-income earners was relatively small
(61% versus 80%). But our latest retirement survey
provides evidence of a widening gap between lower-
and higher-income households, with scores for the
former generally declining and scores for the latter
generally rising (Figure 1).
The median LIS for 2012 was 65, but median scores
were somewhat lower (60) for household incomes
below $100,000, which constitute the majority of U.S.
households. The most recently released data from
the U.S. Census Bureau shows that in 2010 the real
median household income was $49,445, and only
20.5% of households earned incomes above $100,000.1
Counting Social Security, the difference in scores
between the lowest-income earners and the top-income
earners widened significantly in the past year (Figure 1),
growing from 19 to 34. While saving can play a significant
role in retirement preparedness regardless of income,
the retirement gap between lower- and higher-income
workers has clearly grown through the recent period of
economic uncertainty.
1 “Income, Poverty, and Health Insurance Coverage in the United States: 2010” U.S. Census Bureau, Sept. 2010, http://www.census.gov/prod/2010pubs/p60-238.pdf.
Figure 1. Scores improved for the highest-income householdsLi
fetim
e In
com
e Sc
ore
Household income
2012
2011
$100K+ (26%)< $100K (74%)$175K+ (7%)$100K to < $175K(19%)
$50K to < $100K(41%)
< $50K (33%)Total
65% 64%
58%61%
63% 64%
75%72%
92%
80%
60%62%
80%
74%
Percentages next to categories indicate incidence among respondents.
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Figure 2. Distribution by LIS strata
2012 or 2011
100% or more
65% to < 100%
45% to < 65%
0 to < 45% 29% 23%
21%
22%
29%
28%
24%
26%
In general, we have found a rising polarization between
the most prepared and the least prepared for retirement.
Comparing our initial survey results with the results of
our most recent survey, we find that fewer people fall
into the middle tiers of retirement preparedness, but that
a greater number of individuals are either in the lowest or
highest tiers (Figure 2).
As the share of workers with scores between 45 and
99 dropped from 52% to 43%, those scoring below 45
increased from 23% to 29% while those scoring above
100 rose from 26% to 29%. Having said that, the median
score for those who came in below 45 remained rela-
tively stable, while those who scored above 100 saw a
dramatic increase in the median score, which rose from
134 to 154.
The difference in scores between the lowest-income earners and the top-income earners widened significantly in the past year, growing from 19 to 34.
The role of demographicsAlong with income levels, it is no surprise that
demographics continue to play an important role in
determining retirement preparedness and in the
calculation of Lifetime Income Scores. Our latest survey
demonstrates that age, gender, education level, and
employment industry are among the key demographic
factors that affect retirement preparedness.
Lifetime Income Scores decline as age increases. Survey
results show scores dropping from 83% for those age 18 to
34, to 54% for those age 50 to 65. This relationship is likely
the result of two conditions: Younger workers have longer
time horizons until retirement, lower current incomes, and
greater earning potential, while the oldest respondents
(age 50 to 65) have fewer working years remaining and
have likely maximized their earning potential.
Those with the lowest Lifetime Income Scores (< 45)
continue to be disproportionately women and less
educated, and have lower-than-average incomes. By
contrast, those with the highest scores (> 100) continue
to be disproportionately men and more highly educated,
and have slightly higher-than-average incomes and
much higher investable assets. Over the past year,
scores improved for better-educated workers with
higher-than-average incomes, while scores declined for
the less educated and those with lower-than-average
incomes.
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MAY 2012 | Lifetime Income Scores II: Our latest assessment of retirement preparedness in the United States
These findings concur with data showing education
has a direct impact on earning potential and the ability
to maintain continuous employment. According to the
Bureau of Labor Statistics Current Population Survey, in
2011 those with a master’s degree earned roughly twice
as much on a weekly basis as those with a high school
diploma, and the unemployment rate among individuals
with a master’s degree was 3.6%, compared with 9.4%
for those who graduated high school but did not receive
a graduate-level degree. 2
The significance of employment industry Recognizing that retirement plan participation is strati-
fied by a variety of factors related to employment, we
also set out in our most recent survey to determine
2 “Education pays…” Bureau of Labor Statistics Current Population Survey, 2011, http://www.bls.gov/emp/ep_chart_001.htm.
how specific industries compare in terms of the access
they provide to workplace savings plans and in terms of
median Lifetime Income Scores.
Significantly, eligibility for workplace retirement plans
varies widely by industry and drives Lifetime Income
Scores to a large extent. Eligibility ranges from 53% in
the agricultural, natural resources, and mining industries
to 78% in public administration (Figure 3). Thus it is not
surprising that workers in the information industry and
public administration who are eligible to participate in
workplace retirement plans enjoy scores of 100 and 99,
respectively. Workers in these industries without access
to workplace plans score in the 40s. Looking across
industries, our data show that scores for workers who
have access to a workplace retirement plan are about
double the score for workers without access.
Figure 3. Employer plan eligibility by industry
Agriculture, natural resources, and mining (2%)
Other services (8%)
Leisure and hospitality (9%)
Trade, transportation, and utilities (13%)
Construction (6%)
Total
Health care and social assistance (12%)
Professional business services (15%)
Educational services (9%)
Finance industry (6%)
Manufacturing (11%)
Information (4%)
Public administration (5%)
Not eligible Eligible
47% 53%
40% 60%
39% 61%
36% 64%
35% 65%
31% 69%
31% 69%
26% 74%
24% 76%
23% 77%
23% 77%
23% 78%
30% 70%
Percentages next to categories indicate incidence among respondents. Due to rounding, results may not equal 100%.
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Furthermore, eligible and non-eligible workers in the
information industry enjoy the highest combined Lifetime
Income Score (84), while workers in agriculture, natural
resources, and mining have among the lowest scores (54)
(Figure 4). Information industry workers are dispropor-
tionately male, younger, and highly educated, and have
above-average incomes and investable assets. Workers
in agriculture, natural resources, and mining are also like-
lier to be male, but are older and less educated, and have
average incomes and investable assets.
Our survey data continue to demonstrate that qualified-
plan access is a critical component in workers’ pursuit
of retirement security. What’s more, we continue to see
those who are eligible but are not currently participating as
having a relatively high probability of doing so at some
point in the future — either by electing to contribute
or through automatic enrollment, which has become
a generally accepted practice. According to a recent
survey by Hewitt Associates, 57% of large employers
offer automatic enrollment, and an additional 13% said
they were likely to do so. 3
3 “Hot Topics in Retirement 2011,” Hewitt Associates, 2011, http://www.aon.com/attachments/thought-leadership/2011%20Hot%20Topics_Final.pdf.
Figure 4. Lifetime Income Scores by industry
Other services (8%)
Agriculture, natural resources, and mining (2%)
Trade, transportation, and utilities (13%)
Leisure and hospitality (9%)
Construction (6%)
Health care and social assistance (12%)
Professional business services (15%)
Finance industry (6%)
Manufacturing (11%)
Educational services (9%)
Public administration (5%)
Information (4%)
Not eligibleTotal Eligible
84%
80%99%
100%40%
43%76%
93%
70%
69%
67%
42%64%
81%39%
59%83%
42%58%
84%42%
55%78%
40%54%
62%45%
53%74%
39%
86%
82%43%
91%44%
43%
Percentages next to categories indicate incidence among respondents.
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MAY 2012 | Lifetime Income Scores II: Our latest assessment of retirement preparedness in the United States
The impact of home equity and business ownership As we know, money that individuals use to fund their
retirement may come from a variety of sources other
than retirement savings and Social Security. In fact,
many people expect that their home equity and business
ownership will represent key supports once they leave
the workplace. Adding these two factors to retirement
income, the median Lifetime Income Score for all survey
respondents nationally rises from 65 to 70. While this
may seem like a modest increase, the impact is more
significant for those segments that currently own real
estate or businesses (Figure 5).
Our data show that 58% of survey respondents own real
estate, but only 18% own a business. Among workers
who expect to apply their real estate equity to retire-
ment income, the base Lifetime Income Score is 77, but
rises to 84 when home equity is factored in. Similarly,
among workers who expect to apply business value to
retirement income (11%), the base Lifetime Income Score
is 70, but rises to 92 when business value is taken into
account. Lastly, for those who expect to add real estate
or business value, the base score is 75, but rises to 85
when either factor is taken into account.
Figure 5. Home and business ownership give a boost to median LIS
Life
time
Inco
me
Scor
e
Expect Real Estate or Business Value
(33%)
Expect Business Value
(11%)
Expect Real Estate Equity
(27%)
84%77% 75%
70%
92%85%
LIS
LIS Plus
Percentages next to categories indicate incidence among respondents.
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Among workers who expect to apply real estate or business value to retirement income, the base Lifetime Income Score is 75, but rises to 85 when real estate or business value is taken into account.
Financial behaviorArguably the most important factor in the determination
of retirement preparedness is financial behavior.
Defined contribution (DC) plan participation, the use of
an advisor, and a general propensity to save all form the
bedrock of respondents’ Lifetime Income Scores.
Compared with our initial survey, total household
retirement savings — inside and outside workplace
retirement plans — increased from 12.1% of income to
14.2% by year-end 2011. The lion’s share of this increase
came from households eligible to participate in work-
place retirement plans. These households increased
their DC deferral rate from 8% to 9% on average and
increased their retirement savings outside their work-
place plan from 8% to 10%. Looking across deferral
rates in DC plans, the greatest difference year over year
occurred for those households that defer more than 10%
of their income to their retirement savings. Rising from
a median score of 124 to 145 in our latest survey results
(Figure 6), this robust level of participation in workplace
savings plans continues to be a critical factor in helping
ensure retirement security.
Figure 6. Scores improved the most for households with the highest deferral rates
Life
time
Inco
me
Scor
e
Deferral rates
54% 58% 61% 65%
85% 84%
145%
124%
2012
2011
10%+ deferral rate (20%)4% to < 10% deferral rate (23%)
0.01% to < 4% deferral rate (13%)
0% deferral rate (5%)
Percentages next to categories indicate incidence among respondents.
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MAY 2012 | Lifetime Income Scores II: Our latest assessment of retirement preparedness in the United States
Investors’ decision to use or not use a financial advisor
also had a sizable impact on Lifetime Income Scores
over the past year. Those who worked with a financial
advisor rose from a median score of 82 to 89, while those
who did not utilize such services declined from 61 to 58
(Figure 7).
Figure 7. Scores improved for those who use advisors
Life
time
Inco
me
Scor
e
Do not have a paid advisor (76%)Have a paid advisor (24%)
82%
89%
58%61%
2012
2011
Percentages next to categories indicate incidence among respondents.
Within qualified plans, another revealing detail appears
in a comparison of self-directed and professionally
advised portfolios. Advised portfolios were more heavily
weighted to equities and fixed income, while non-
advised portfolios had a pronounced bias toward cash
(Figure 8).
Figure 8. Non-advised qualified plan portfolios have the majority of their assets in cash
Not AdvisedAdvised
Cash, money market mutual funds, or other cash equivalents
57%
Stock or stock
mutual funds 30%
Stock or stock
mutual funds 42%
Bonds or bond mutual
funds 22%
Bonds or bond mutual
funds 14%
Cash, money market mutual funds, or other cash equivalents
37%
Due to rounding, results may not equal 100%.
Generally speaking, investors moved a greater share of
retirement assets into the most conservative investment
vehicles over the course of 2011. Both outside and inside
qualified retirement plans, asset allocation shifted sharply
to cash — rising from 43% to 52% within qualified plans—
primarily at the expense of equities. This has important
implications for retirement savings, as investors who
opt for the sidelines may significantly limit their ability to
capture the upside potential of equity market rallies.
Our latest survey shows that having a financial plan has
a significant impact on results. Individuals with a formal-
ized, written financial plan scored much higher than
those who did not have such a plan. Looking at the
portion of respondents who did have a plan (17%), 71%
factored in health-care costs while in retirement. While
this number sounds promising for the most prepared —
and correlates with higher scores for this group
(Figure 9) — it also tells us that only 12% of workers factor
health-care costs into their retirement planning. As we
will discuss, this low incidence of more comprehensive
planning presents one of the biggest opportunities for
investor education, especially as concerns over rising
health-care costs appear to be widespread.
A robust level of participation in workplace savings plans continues to be a critical factor in helping ensure retirement security.
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Figure 9. Scores are higher for those who have a plan
Life
time
Inco
me
Scor
e
Have a plan that considers
health care
Have a financial plan
Do not have a financial plan
123%117%
58%
Eroding confidenceAs the risk-averse trend in asset allocation suggests,
the majority of households are feeling more concerned
about the economy and their investment prospects.
More than 50% of survey respondents expect inflation
will rise in the year ahead, and about a third of workers
expect unemployment will rise in their local region. The
greatest area of uncertainty, however, pertains to health
care. Nearly 65% of workers expect health-care costs
will rise in the next year — and 18% expect these costs
will rise substantially (Figure 10).
Figure 10. Economic expectations
Home values in your area
The stock market
Long-term interest rates
The unemployment rate in your area
The unemployment rate nationally
Inflation
Health-care costs that you pay
Much lower Somewhat lower Same Somewhat higher Much higher
1%
6% 38% 43% 12%2%
3% 21% 45% 22% 9%
6% 21% 42% 28% 4%
7% 19% 48% 23% 3%
3% 12% 50% 30% 5%
3% 22% 41% 24% 10%
4% 31% 45% 18%
Due to rounding, results may not equal 100%.
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MAY 2012 | Lifetime Income Scores II: Our latest assessment of retirement preparedness in the United States
With more than six workers in ten expecting that their
out-of-pocket health-care costs will be higher in the year
ahead, the proportion of workers focused on saving for
these expenses is up sharply even as most other savings
priorities are flat to declining (Figure 11).
Against the backdrop of this uncertainty, we sought
to determine the level of interest in planning tools
that could bring clarity to workers over the ques-
tion of health-care costs. Specifically, we gauged the
level of workers’ interest in a planning tool that could
help estimate these expenses and accommodate
them in retirement planning. We found that a majority
of workers — 60% — would be interested in this kind
of tool, with 14% of all respondents expressing strong
interest. What’s more, interest was strong regardless
of income, level of investable assets, or Lifetime
Income Score.
Significantly, the most prepared for retirement (with
scores greater than 100) expressed the strongest level
of interest in a health-care planning tool; similarly, 20%
of households with the highest level of income ($175K+)
would be “very interested” in such a tool (Figure 12).
The health-care question is of particular importance
for those who plan to retire prior to becoming eligible
for Medicare, as the prevalence of employer-sponsored
health-care coverage for retirees has declined dramati-
cally in recent years. Among large, private-sector
employers (200 or more employees), only 26% offered
retiree health benefits in 2011, down from 28% in 2009
and 66% in 1988. 4
4 “2011 Employer Health Benefits Survey,” Kaiser Family Foundation and Health Research & Educational Trust (HRET), http://ehbs.kff.org/pdf/2011/8225.pdf.
Figure 11. Saving for health-care costs gaining traction as a key objective
Building an estate for your heirs
A child's education
Saving for health-care expenses
A major purchase or expenditure somewhere in the future (home, car, boat, or vacation)
Saving for unexpected expenses apart from health care
Paying down debt
Retirement
20112012
62%62%
40%
33%29%
26%25%
24%15%
24%19%
13%8%
46%
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Figure 12. Health-care planning tool interest by household income
$175K+
$100K to < $175K
$50K to < $100K
< $50K
Total
Not interested Not very interested Somewhat interested Very interested
17% 24% 46% 14%
10%45%25%20%
17% 24% 47% 13%
19%47%21%14%
16% 24% 40% 20%
Due to rounding, results may not equal 100%.
Factors for successOne of the most encouraging findings in our initial
survey, for which we began gathering data in 2010, was
that households in the top quartile (replacing 100% or
more of income) and the bottom quartile (replacing
less than 45% of income) had exactly the same average
income ($93,000). The difference was that one group
had saved and invested, while the other had not. While
our most recent data suggest a widening gap between
lower- and higher-income households, we continue to
see saving and related behaviors as the most influen-
tial factors on Lifetime Income Scores and retirement
preparedness. In other words, financial decision making
can make all the difference in retirement preparedness,
and the future can still be altered by making positive
adjustments to financial behavior.
Active participation in a DC plan — Results show that
eligibility to participate in an employer-sponsored plan
has the most impact on Lifetime Income Scores; however,
many households are not optimizing this opportunity.
Deferral rates of 10% or more — To help ensure adequate
retirement security, households should actively participate
in their employer-sponsored DC plans and defer at least
10% of their income.
Use of an advisor — Households utilizing the services of a
paid financial advisor have access to more comprehensive
and customized investment management. Those using
an advisor achieved a median score that was nearly 54%
higher, inclusive of Social Security.
Confidence in decision making — Households that indi-
cated higher confidence in their financial decision making
ability earned higher Lifetime Income Scores. This was
true across several aspects of the financial planning
process, from confidence in being able to achieve a finan-
cially secure retirement to understanding how much it
would cost to maintain adequate health-care coverage.
The key to confidence is education, and by equipping
households with the tools to measure and improve their
own retirement preparedness, they are then empowered
to achieve a more financially secure retirement.
MAY 2012 | Lifetime Income Scores II: Our latest assessment of retirement preparedness in the United States
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Survey methodology
•3,958 working adults, age 18 to 65
•Conducted online, 11/28/11–12/26/11
•Weighted to Census parameters for all working adults
The Putnam Lifetime Income ScoreSM represents an
estimate of the percentage of current income that an indi-
vidual might need to replace from savings in order to fund
retirement expenses. For example, consider an individual,
45 years old, with an income of $100,000 per year. A
Lifetime Income Score of 65% indicates that the individual
is on track to be able to generate $65,000 in retirement
income (in today’s dollars), i.e., 65% of current income.
This income estimate is based on the individual’s amount
of current savings as well as future contributions to
savings (as provided by participants in the survey) and
includes investments in 401(k) plans, IRAs, taxable
accounts, variable annuities, cash value of life insurance,
and income from defined benefit pension plans. It also
includes future wage growth from present age (e.g., 45)
to the retirement age of 65 (1% greater than the Consumer
Price Index for Urban Wage Earners and Clerical Workers
(CPI-W)) as well an estimate for future Social Security
benefits.
The Lifetime Income Score estimate is derived from the
present value discounting of the future cash flows associ-
ated with an individual’s retirement savings and expenses.
It incorporates the uncertainty around investment returns
(consistent with historical return volatility) as well as the
mortality uncertainty that creates a retirement horizon of
indeterminate length. Specifically, the Lifetime Income
Score procedure begins with the selection of a present
value discount rate based on the individual’s current
retirement asset allocation (stocks, bonds, and cash). A
rate is determined from historical returns such that 90% of
the empirical observations of the returns associated with
the asset allocation are greater than the selected discount
rate. This rate is then used for all discounting of the
survival probability-weighted cash flows to derive a
present value of a retirement plan.
Alternative spending levels in retirement are examined in
conjunction with this discounting process until the present
value of cash flows is exactly zero. The spending level that
generates a zero retirement plan present value is the
income estimate selected as the basis for the Lifetime
Income Score. In other words, it is an income level that is
consistent with a 90% confidence in funding retirement. It
is viewed as a “sustainable” spending level and one that is
an appropriate benchmark for retirement planning.
The survey is not a prediction, and results may be higher
or lower based on actual market returns.