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While Most Believe IRAs are Worthwhile, Uncertainty Reigns:
AARP Exec: "IRAs Are America's Great, Forgotten Retirement Plan"
Is There a Need? Nearly Half of Respondents Say They Have Less than $50K Saved for Retirement
TEWKSBURY, MA — Individual Retirement Accounts (IRAs) remain a misunderstood and underutilized retirement savings vehicle, according to the results of a nationwide survey by AARP Financial Inc. released here today.
Of 1,203 adults age 18+ surveyed, only 39% said they owned an IRA and many expressed confusion about an array of issues from eligibility, to contribution limits, to tax deductibility.*
"Almost 35 years after their advent, the IRA has become the great, forgotten retirement plan," said Richard Hisey, Chief Investment Officer and Treasurer of AARP Financial Inc., a taxable subsidiary of AARP. "An IRA account should be a pillar of most retirement portfolios."
The survey of 1,203 adults age 18 or older was conducted by telephone from January 23 to February 10, 2008 by GfK Roper Public Affairs & Media, a division of GfK Custom Research North America. The margin of error for the sample of 1,203 respondents is plus or minus 3.8 percentage points.
Better than seven in ten (71%) of those surveyed believe that IRAs are "worth the bother," but only 39% of respondents have an IRA.
Relatively low participation rates are hardly surprising given that 36% say they're not sure or don't know whether they are eligible to contribute to an IRA and 44% say they don't really understand how an IRA works.
Generally, the numbers are less encouraging for workers under age 50 than those 50+. Among workers under 50, 32% say they have an IRA (versus 48% of workers 50+) and 49% say they don't know how an IRA works (versus 38% of workers 50 and over).
"With Social Security representing only a portion of a retiree's income and pension coverage increasingly the exception and not the rule, tax-advantaged retirement savings vehicles, such as an IRA, have never been more important," Hisey said. "That's particularly true for younger workers."
"Despite heightened awareness of the need to save, our research shows that investors have been overwhelmed by a mix of financial jargon and product overload," Hisey said. "The result is that many consumers are not taking even the most basic steps to secure their retirement."
Even some of those with IRA accounts could do a better job of maximizing their impact.
The survey found that one-quarter of employed IRA account holders did not make a contribution this year or last.
"Retirement security does not happen over night, but with diligence and planning, it can happen over time," Hisey said. "Opening a retirement account without funding it is like enrolling in college but never going to class. Eligible IRA holders should contribute every year, as early in the year as possible. The path to retirement security is comprised of a bunch of small steps."
Clearly, confusion around IRA rules does not encourage optimal participation, and the survey revealed a significant lack of understanding about IRAs. For example:
"For many Americans, I-R-A seems to stand for 'Intricate Retirement Account,'" Hisey said. "While changes to the IRA have made it a more powerful retirement planning vehicle, those modifications require ongoing education."
"Most Americans face a woefully under-funded retirement," said Hisey. "It's not unusual for Americans to have less than $50,000 in accumulated retirement savings. There's a real disconnect between the value consumers place on IRAs and their understanding and use of these critical retirement savings vehicles. That's unfortunate, because for the vast majority of Americans, IRAs remain an important asset accumulation vehicle and, with the advent of the Roth IRA, a terrific tool for income distribution in retirement."
With the 2007 IRA tax deadline approaching, it is an opportune time to encourage more Americans to consider IRAs and to help to clarify some common misperceptions.
"I think for many companies in the financial services arena, there is a sense of 'been-there, done-that' when it comes to IRA education," Hisey said. "In reality, there is a whole new generation of workers who need exposure to the merits of opening and funding an IRA account- and most of the rest could use an occasional refresher course. Clearly, IRAs need to be reintroduced to the American public."
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Survey Methodology: To permit in-depth analysis of Americans age 50 and older, the randomly selected national sample of 1,203 respondents included 400 people 18-49 years of age and an over-sample of people 50 and older. The sample was randomly selected using RDD (random digit dialing) methods and was weighted to U.S. Census statistics, to correct for the over-sampling of people 50 and older and to ensure that the survey is representative of the U.S. national population 18 and older.
About AARP Financial Inc.
Founded in 2005, AARP Financial Inc. is a wholly owned taxable subsidiary of AARP. AARP Financial Inc. is dedicated to helping people age 50 and over prepare for a more secure financial future by offering products and services designed to meet their retirement needs. AARP Financial offers a carefully chosen array of investment products and guidance, including mutual funds from AARP Financial, designed to meet the needs of investors at any life stage; auto and home insurance through The Hartford; credit cards through Chase; online savings and checking accounts and certificates of deposit through the AARP Financial Savings Center powered by Waterfield Financial Services, Inc.; life insurance and lifetime income annuities through New York Life; and mobile home and motorcycle insurance through Foremost. AARP Financial won the Mutual Fund Education Alliance's 2006 STAR Award for Best Investor Fulfillment/Prospectus Kit and Best Retail Retirement Kit by a small company. Visit us at www.aarpfinancial.com for more information.
While AARP endorses the services provided by AARP Financial Inc., AARP does not offer financial products or services itself and cannot recommend that you or any specific individual should purchase any particular product or service. AARP Financial Inc. is a registered investment adviser and a subsidiary of AARP.
*AARP Financial, Inc. does not provide tax advice. Please consult a tax advisor for information pertaining to your particular situation.
