Most workers still struggle to invest in their retirement. This could help.

By Jessica Hall

Nearly 80% of workers say they don't know much about their finances

Getting started with retirement investing has gotten cheaper and easier than ever. But half of America's middle class is still only guessing about how much money they'll need for retirement, and the vast majority don't understand their finances.

According to a recent study called "The Retirement Outlook of the American Middle Class" conducted by the Transamerica Center for Retirement Studies and the nonprofit Transamerica Institute, only 21% of people surveyed said they have "a lot" of knowledge about topics such as managing money, investments, debt, risk and taxes, and just one in three people in the middle-class segment have a professional financial adviser, the study found.

The study, which surveyed adults with annual household income ranging from $50,000 to $199,000, found that among those who are not yet retired and who have estimated their retirement savings needs, 50% indicated that they guessed at that amount.

"One major opportunity for people in the middle class is increasing their knowledge of personal finance," the TCRS report said. "A strong knowledge can help them make more informed decisions in budgeting, daily decision-making, and long-term financial planning."

For those who want to invest but may need some help, robo advisers have become less expensive and easier to use.

"It's hard to overstate what a great time it is to be an investor. The amount of information available is so vast for anyone who wants to start," said Bankrate analyst James Royal. "Really, truly there are a lot of Americans who don't invest. But robo advisers make it accessible for people to do it if they want to."

For example, investment-management company Vanguard recently cut its asset requirement to $100, down from $3,000 previously, for its Vanguard Digital Advisor service.

Vanguard Digital Advisor, which was launched in 2020, offers a robo-adviser service for financial planning and investment that helps clients identify their retirement and other financial goals, then creates and manages a custom investment portfolio. As of June 30, 2024, Vanguard Digital Advisor had more than $19 billion in assets under management, Vanguard said.

"Everyone deserves the highest-quality investment advice. This is breaking down the barriers. Three thousand dollars was out of reach for a meaningful portion of our clients," said Brian Concannon, head of Vanguard Digital Advisor. "It offers greater accessibility, and that's a good thing."

Charles Schwab (SCHW), another financial-services firm, has a service called Intelligent Portfolio that offers robo advisers that build, monitor and automatically rebalance a diversified portfolio based on the investor's goals. The minimum to get started with that service is $5,000, Schwab said. At Fidelity Investments, the Fidelity Go robo adviser requires no minimum amount to open an account and a minimum of $10 to invest. Fidelity Go charges no advisory fees for accounts under $25,000.

The first robo advisers - Wealthfront, formerly known as KaChing, and rival firm Betterment - were formally founded in 2008 but took a few years to fully mature. Today, about 100 robo advisers exist. The assets under management for the sector are expected to reach about $1.8 trillion worldwide this year, according to research firm Statista. (There are many more companies offering low-cost robo advice, including E-Trade and Acorns. Consumers should make sure to read the account details so they know what the account minimums and fees are.)

"The floor on robo advisers is almost zero," Bankrate's Royal said. "It's valuable for a lot of people who have no idea where to start or what to do. And a lot of people have no idea. Robo advisers make it so easy to get started."

The proliferation of low-cost financial advice comes as the U.S. faces a retirement crisis. As pensions become increasingly rare, individuals have to financially plan for a retirement that could last decades.

As of March 2023, 73% of civilian workers had access to retirement benefits, but only 56% of workers participated in these plans, according to the Bureau of Labor Statistics. Workplace retirement-savings plans are the most common way to save for retirement, but the average 401(k) balance is only $127,100, according to Fidelity Investments.

That's a long way from the amount people feel they need to finance a comfortable retirement. And there's also a financial-literacy gap: Recent data from Principal Financial Group found that 59% of respondents who thought they were contributing to their 401(k) actually were not.

Royal said human advice may not be necessary for a lot of people starting out.

"Stock picking has become commoditized. Human advisers are no longer needed for picking stocks. The real value-add for advisers is a lot of psychology and helping you stick to a long-term plan when the market turns, or helping you see the big picture," Royal said.

Human advice can require $250,000 to $500,000 or even more in assets to get in the door, Royal said. At Vanguard, clients who want to work with a human adviser who is a licensed financial professional need to have $50,000 in assets under management.

Still, human advisers can offer more personalized advice and deal with complicated issues that a robo adviser could never handle, Royal said.

"It can get more complicated with legal issues, estate-planning issues and passing assets to another generation. More complex questions may need some more complex advice that often takes a human element," Royal said.

For many investors, getting robo advice is just a starting point.

"Robo advice is not the same advice as you're going to get at $100,000 or $1 million," said Paul Merriman, founder of the Merriman Financial Education Foundation and a MarketWatch contributor. "You're not going to have a financial adviser for life for a minimum of $100."

"The good news is there's an amazing amount of free advice on the internet. But the bad news is that there's an amazing amount of bad advice on the internet," Merriman said. "The challenge is getting someone with $100 to take $100 seriously - that it's the first step in a $1 million portfolio."

Although the information is available and the trading tools exist, Merriman said, many people don't seek them out.

"All the information is there. It takes 20 hours of devoted time to learn what will service you for the rest of your life. Students are coming out of college having spent 16,000 hours of study from kindergarten to college, but most don't come out of college with any knowledge on investing. Will they make that extra time to learn? I don't know," Merriman said.

Catherine Collinson, chief executive of Transamerica Institute and TCRS, pointed out that workers who have access to 401(k) plans already have widespread access to financial advice and guidance through their employer's plan. But more help is needed for the mass consumer market.

"Robo advice will make more services available for the masses, but there's still innovation needed. The 401(k) market has a lot of the advice, but the consumer market - there's still ample opportunity," she said.

"Knowledge is power. It's important to learn as much as you can - and to remember no one cares more about your retirement than you and your family," Collinson said.

-Jessica Hall

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

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09-27-24 1348ET

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