At the end of last quarter, consumers had far more confidence in their current finances than they did in their ability to afford the retirement they want—a confidence gap that advisors need to address, said David Blanchett, portfolio manager and head of retirement research at PGIM’s defined contribution arm.

Blanchett last week released PGIM’s RetireWell Confidence Index for the fourth quarter of 2023. While it showed both financial confidence and retirement confidence have rebounded from the lows of 2022, only financial confidence is on track to get back to where it was in the fourth quarter of 2021. PGIM is the $1.2 trillion global investment management arm of Prudential Financial.

“Both financial confidence and retirement confidence went down a lot [in 2022]," Blanchett said. "But retirement confidence was the one that took the larger beating."

The Confidence Index survey questions focus on financial confidence (“Overall, how are you feeling about your finances?”) and retirement confidence (“Do you think you’ll have enough savings for the retirement you want?”). The survey includes responses from more than 300,000 employees who have access to a defined contribution plan.

Participants can report six possible levels of confidence: very low, low, below average, above average, high and very high.

Financial confidence has been the more resilient of the two, and responses in the fourth quarter for that category were above average. Responses for retirement confidence, however, were below average. In addition, the Index reported, the gap between the two categories has been widening since the beginning of 2022.

To put RetireWell's fourth-quarter responses in context, from 2018 to 2020 respondents reported confidence just above average. It wasn’t until about the first quarter of 2021 that the index rose into high territory.

Since the fourth quarter of 2021, the index has been in decline, with a sharp drop through 2022 to below average, where it has stayed. A contributing factor was the terrible performance of stocks and bonds in 2022, with many investors seeing their account balances drop roughly 20%. Record-breaking inflation that year was another gut punch, as were increasing interest rate hikes.

In the fourth quarter report, respondents older than 60 with at least $200,000 in household income expressed high confidence levels in both categories, while respondents younger than 30 making less than $50,000 generally scored lowest.

However, participants between 30 and 44 generally had higher confidence levels than those closer to retirement—the participants between 45 and 59, a result seen in other similar studies.

“I think what that means is that for that demographic, we need to keep reiterating to folks they’re going to be OK, and they need to keep saving,” Blanchett said. “Retirement is still a bigger issue for people than just general financial confidence. Making sure that they know how to access tools, or guidance if they have questions, is so important.”

On the heels of 2023’s solid returns, recent data showed a wave of unforeseen retirements—as much as 2.7 million more than expected. Blanchett said that is in keeping with historical trends tying retirement to stock market performance, and it gives him some pause for concern.

“We’ve tended to see people retire when the markets went up, and they wouldn’t retire when the markets went down,” he said. “But people would time it wrong. They would retire at a peak. Then the market would dip, and they’d be stuck.”

Sequence of returns risk is real if investors time their retirement to the markets, he said. “They retire at a peak, start pulling money out, and that’s when things can go wrong,” he said.

More central to the issue of retirement, he said, and one that could dampen the sequence of returns risk, is the changing definition of what retirement means, he said. Gone it seems are the days when retirement meant not working at all.

Instead, more people of retiring age are bowing out of the 40-hour-a-week job but continuing with income-producing work so they can put off accessing their savings for as long as possible, he said.

“This pool didn’t exist pre-Covid,” Blanchett said, explaining that the chance that people on the verge of retirement could die without ever seeing a day of it meant they are now quicker to want to cut the career cord, but don’t want to sacrifice the longevity of their portfolios. “So the idea of retirement is changing structurally.”