putnam perspectives: lifetime income scores ii

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.

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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.


3

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.

4


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%.


5

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%


6


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



7

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%)


8


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


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.


9

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%


10


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%


11

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%


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.


Putnam Investments | One Post Office Square | Boston, MA 02109 | putnam.comPutnam Retail Management

DC939 274830 5/12

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.

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