Navigating the Financial Vortex

As we near the end of 2023, financial markets and economic indicators appear stronger relative to a year ago. Even if the macro environment isn’t optimal yet, retirement confidence is up, with lower saver stress and improved savings rates.

Those are some of the insights from Goldman Sachs Asset Management’s 2023 Retirement Survey. (You can read the entire report on Goldman Sachs Asset Management’s website.)

Despite these encouraging signs, however, they found that the challenge of the financial vortex, (the swirl of competing financial priorities many of us experience that can reduce or derail retirement savings plans), has remained virtually unchanged since their last retirement survey in 2022.

Here are key findings from the 2023 report.

Retirement sentiment improved, but the financial vortex effect remains

Even though economic conditions have improved, the reality of the financial vortex is here to stay. Competing priorities – such as credit card debt, paying down student loans, saving for college, child or elder care, or financial hardships – and limited financial resources make it difficult for individuals and families to balance multiple goals.

The impact of competing priorities can take a significant toll on retirement savings, leading many to reach retirement unprepared. Our colleagues calculated that individuals impacted by multiple challenges could see their total retirement savings reduced by almost 40%. And 21% of respondents report the impact of competing priorities on their retirement savings is likely to delay their retirement by four or more years.

Despite low financial literacy, many are managing their retirement savings on their own

Nearly half of working respondents (47%) are trying to self-manage their retirement savings. But how prepared are they?

Financial literacy is commonly evaluated by asking respondents five basic standardized questions about interest, inflation, compounding and diversification. Only 13% of survey respondents correctly answered all five questions.

Personalized planning provides many benefits, but may heighten awareness of the vortex 

For the purposes of this survey, personalized planning was defined as calculating the amount of total retirement savings needed and how to save and invest to help achieve that goal. Sixty percent of working individuals have a basic financial plan.

The survey found a personalized retirement plan can increase confidence and reduce stress. More than 80% of those with a plan feel confident they can reach their goal, compared to 40% of those without a plan who feel confident.

But a plan isn’t a cure-all. It can also heighten savers’ awareness of the financial vortex. Interestingly, those with a plan actually report feeling more impacted by competing financial priorities than those without a plan.

Savers may not be well prepared for emergencies

Financial hardships can have a direct impact on retirement savings, and 42% of working respondents report experiencing a financial hardship at some point in their lives that caused them to stop saving for retirement.

Financial professionals commonly suggest at least three months of emergency savings to help weather unexpected financial emergencies. Just 8% of working respondents had no emergency savings at all, but 56% say they have less than the recommended three months of emergency savings and likely need more to bolster their financial resilience.

3 steps can help savers deal more effectively with the unexpected 

It may be impossible to completely avoid the impact of the financial vortex. Most of us have multiple financial goals throughout our lives, and many of the biggest challenges to preparing for retirement can show up out of the blue.

Fortunately, according to our Asset Management colleagues, there are three practical steps that may help increase the chances of building a retirement nest egg, whatever surprises life may have in store.

1. Increase financial literacy. Financial education enables retirement savers and retirees to feel confident and empowered navigating financial challenges and managing the financial vortex. Savers with better financial literacy are less likely to say competing financial needs have a high impact on their retirement savings.
2. Follow a personalized financial plan. While seemingly basic, a plan can help put savers on the right path towards their retirement. More than three quarters (78%) of working respondents with a financial plan report their retirement savings are on-track or ahead of schedule, compared to 34% of those without a plan. A plan can also help savers avoid unwanted delays to retirement: 32% without a plan believe competing priorities will delay their retirement by four or more years, compared to 14% with a plan.
3. Build an emergency fund. To keep a personalized financial plan on track, it’s important to be able to deal with unexpected challenges that come up. Emergency savings can significantly help alleviate worries about competing priorities. Those with more than three months of emergency savings are more likely to feel very comfortable managing their savings and less likely to report that their retirement savings are impacted by the financial vortex.

The role of the 401(k) plan may be evolving

Employer-sponsored retirement plans are the resource retirees most commonly list as an essential part of their retirement preparations. However, a typical 401(k) plan, as it was originally designed, may not meet the needs of today’s workers and their vortex of financial challenges.

Growing awareness of employee needs among plan providers plus the passing of SECURE Act 2.0 has opened the door for plans to evolve in the future to address a broader range of financial concerns. Discussions are underway to expand the role of 401(k) plans to potentially address:

• Emergency savings
• Student loan repayments
• Financial education
• Professional advice services
• New distribution options
• Guaranteed income