Why pre-retirees with a plan are better off in retirement

A new report from T. Rowe Price adds to the mountain of evidence about the benefits of formal financial planning for Americans approaching retirement.

The global investment management firm known for its focus on retirement solutions shared insights from its 2023 annual Retirement Savings and Spending study, which surveyed more than 3,000 401(k) participants across the US, including full-time and part-time workers.

Those individuals, ranging in age from 18 upwards, showed a clear correlation between formal financial planning and enhanced retirement wealth. Based on the research, those entering retirement with a retirement plan had up to four times more wealth than non-planners.

In one notable insight, the report found heightened optimism among those who have charted a financial road map for retirement. Individuals with a formal plan were 62.5 percent more confident in their financial future, emphasizing financial advisors’ role in fostering a sense of security and preparedness.

Financial planning could also encourage pre-retirees to stay the course, as having a financial plan correlated with a greater likelihood of increased contributions to retirement funds.

"The retirement industry has historically focused on helping savers climb the hill of contributing toward their future retirement," said Bill Meyer, the founder and CEO of retirement fintech firm Retiree Inc., which T. Rowe Price acquired last year. “However, given the number of complex financial decisions facing retirees on the other side of that hill, the need for better planning and guidance through retirement is clear.”

The research also sheds light on the urgent need for financial planning, particularly among those nearing retirement. Critically, two-fifths (38 percent) of respondents over 50 said not having enough money is the most significant roadblock to their starting on retirement planning.

The study also revealed substantial interest in planning tools and financial advice, with 40 percent of participants saying they’re willing to use digital tools along with an advisor.

"Advances in technology have given investors greater access to effective and convenient solutions for personalized financial planning, and we expect the demand to increase, especially for tools involving retirement income," Meyer said.

The T. Rowe Price study also unearthed a concerning gap in literacy around investment and annuity products. Between 35 percent and 56 percent of individuals on the cusp of retirement admitted to having a poor or very poor understanding of these crucial financial instruments.

That lack of knowledge extended to retirement savings withdrawal strategies, with a staggering two-thirds (65 percent) of pre-retirees being uncertain about how much they can safely withdraw from their retirement funds without jeopardizing their financial stability in later years.