Wells Fargo/Gallup poll: Investors not ready for surprise expenses

According to a new Wells Fargo/Gallup survey, while individual U.S. investors remain optimistic about the economy, many say they are one emergency away from encountering expenses that could cripple their finances. Barely half of investors — 55 percent — describe themselves as “very well prepared” to deal with an unexpected $5,000 expense, while 44 percent are only somewhat prepared or not prepared. Most investors, 83 percent, feel very well prepared to deal with an unforeseen $1,000 expense, but confidence drops to 33 percent for a $10,000 expense. 

While many of these investors have significant investments, that money isn’t necessarily available for sudden expenses, particularly if it is locked in tax-deferred retirement accounts that may be subject to taxes and IRS penalties for early withdrawals. 

The Investor and Retirement Optimism Index was essentially unchanged in the third quarter, coming in at a relatively positive 98, similar to 103 in the second quarter. However, it was a bit higher throughout most of 2017, ranging from 100 to 117. Prior to 2017, the last time the index was as high as it is now was in November 2000. 

These findings are based on the third-quarter Wells Fargo/Gallup Investor and Retirement Optimism Index survey, conducted Aug. 13-20. For this survey, investors are defined as U.S. adults who have $10,000 or more invested in stocks, bonds or mutual funds.

“I’m intrigued that the findings show confidence in both the personal and economic dimensions remain high yet close to half would be challenged to handle an unexpected expense of $5,000,” said Dan Prebish, director of life event services at Wells Fargo Advisors. “Given the proportion of investors who appear to be cash-strapped and don’t have detailed financial plans, I have to believe that many may see their financial futures through rose-colored glasses.”

The survey found that:

• 15 percent of non-retired investors appear highly proactive and disciplined, setting specific financial goals and detailed plans to reach them (nicknamed financial dynamos).

• 49 percent say they have specific financial goals but rely on broad strategies versus specific plans (financial dabblers).

• 36percent are unanchored, saying they manage their finances as they go (financial drifters). 

The data suggest that financial dynamos benefit from their detailed planning. They are a bit more confident than financial dabblers that they will have enough money to maintain their preferred lifestyle in retirement (81 percent versus 72 percent). They are also more likely than the dabblers to say they are very well prepared to handle an unexpected $5,000 expense (70 percent versus 59 percent). 

The poll also found that very few investors seek professional advice when planning:

• 13 percent handle their planning by working with a dedicated financial advisor.

• 38 percent say they mostly do their own planning with occasional advice from a professional advisor.

• 42 percent say they do all their own planning with no professional advice.

• 7 percent say they do no financial planning.

Do-it-yourself investors, who do all or most of their own planning, don’t utilize external tools or sources:

• 42 percent rely on their own knowledge or experience for financial planning.

• 20 percent rely on friends or family.

• Less than half utilize expert sources such as online financial tools (24 percent), financial publications (10 percent) or financial courses/videos (4 percent). 

Of five possible savings goals that non-retired investors might have, saving for a child’s college education is the one they are having the most difficulty reaching. Among those focused on this goal, 27 percent have completed or made a lot of progress toward it. Another 35 percent say they have made some progress saving for a child’s college. However, 38 percent — the highest for any goal — have made no progress at all.

Beyond buying a home, which most investors have done, investors have been the most successful at saving for a vacation (57 percent of those with this goal say they’ve completed saving or made a lot of progress) and building a three-month emergency fund (56 percent).

“We hear about the crippling effects of massive student loan debt and based upon the difficulties parents are having saving for their child’s education, it appears this trend will continue for the foreseeable future,” said Prebish.

The poll explored several specific sacrifices investors may have to make to improve their financial goals. Of 11 different actions that could help non-retired investors improve their balance sheets, holding on to their cars longer than they would prefer is the most common investors foresee taking — 81 percent say they have already done this or are likely to in the future. Working for more years than they would prefer ranks second at 70 percent. 

Other strategies that majorities of non-retired investors either expect to employ in the future or already have employed are:

• Cancelling their TV subscription (65 percent).

• Cutting back sharply on their daily living expenses (62 percent).

• Getting a less expensive cellphone plan (57 percent).

• Cutting back on vacations (53 percent).

• Staying in a job or career they don’t like (52 percent). 

Not only does the slight majority think they will have to stay in a bad job to support their financial goals, but about half of this group (27 percent) said they have already done this. 

“We all have to make financial tradeoffs from time to time, but it’s disheartening to learn that one in four working investors has had to endure a bad job experience for financial reasons,” said Prebish. “Having a specific plan and building savings creates a ‘bridge’ that could potentially reduce negative scenarios such as this.”

Four sacrifices non-retired investors don’t anticipate making are downsizing to a smaller home (42 percent), getting a second job (32 percent), foregoing saving for a child’s education (28 percent) and delaying having children or having fewer children than they would prefer (26 percent). 

The results of the current Wells Fargo/Gallup Investor and Retirement Optimism Index are based on a Gallup Panel web study completed by 1,059 U.S. investors.