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Retirement: How To Avoid Outliving Your Savings |
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FORECASTS & TRENDS E-LETTER IN THIS ISSUE: 1. Too Many Have Saved Too Little For Retirement 2. Retirement Saving Balances Up; Number of Accounts Down 3. Small Business Owners Don’t Save Enough For Retirement 4. Fidelity Study: Tips For Saving More For Your Retirement 5. America Has a Retirement “Spending Problem” 6. How to Not Outlive Your Retirement Savings Overview With over 10,000 Baby Boomers retiring every day, a pattern that will continue for the next 20 years, retirement savings continues to be one of the most important issues of our day. With 76 million Americans born between 1946 and 1964 – the “Baby Boom Generation” – saving enough for retirement is critically important. Unfortunately, study after study continues to find that most older adults have not saved nearly enough for their retirement, especially considering that we are living longer due to medical advances and taking better care of ourselves. Today, we’ll start by looking at some recent data on retirement saving and how this remains a huge problem for most Americans We’ll also look into why it is that many people overspend in retirement and get into trouble. Following that discussion, we will look at some ways to make sure that you don’t outlive your savings. Too Many Have Saved Too Little For Retirement A new survey from BankRate.com found that more than a third of working-age Americans have nothing saved for their golden years. This includes 14% of people ages 65 and older, 26% of those ages 50 to 64, 33% of those ages 30-49 and 69% of those ages 18-29. Greg McBride, chief financial analyst for Bankrate.com concluded: “These numbers are very troubling because the burden for retirement savings is increasingly on us as individuals with each passing day. Regardless of your age, there is no better time than the present to start saving for your retirement. The key to a successful retirement is to save early and aggressively.” Other recent research confirms that many people aren’t saving enough for their golden years. A similar study by the non-profit Employee Benefit Research Institute found that apprx. 36% of workers have less than $1,000 in savings and investments that could be used for retirement. This same study found that 60% of workers have less than $25,000 saved toward their retirement. Many people realize that they are not on track in saving for retirement, but the two most important reasons they give for this are cost of living increases and low paying jobs that prevent them from saving more. Other findings from the Bankrate.com survey are mixed: • Some people are starting to tuck away retirement savings at an earlier age. About 32% of people ages 30 to 49 started saving for retirement in their 20s compared with 16% who began in their 30s. • About 24% of people 50 to 64 started saving for retirement in their 20s, vs. 21% who began in their 30s. About 16% of people 65 and older started saving for retirement in their 20s; 15% in their 30s; and 17% in their 40s. • 24% are less comfortable with their debt than they were a year ago; 23% are more comfortable. • Job security, net worth and overall financial situation are areas in which people have seen improvement over one year ago. • 32% of people are less comfortable with their overall savings now than they were a year ago; 16% are more comfortable. BankRate.com’s Greg McBride concludes: “Month in and month out, consumers sound a dour tone about how they feel about their overall level of savings. Many people know they are under-saved whether it’s for emergencies, retirement or both.” In another study, the Boston College Center for Retirement Research estimates that in 2010, over half of working Americans, 53%, were on a path to having insufficient assets to comfortably retire at age 65. The National Institute for Retirement Security puts the total under-saving gap as high as $14 trillion nationwide. Retirement Saving Balances Up; Number of Accounts Down While the economic recovery has been disappointing over the last several years, those Americans with retirement accounts (IRAs, 401(k)s, etc.) have seen their balances go up over the last few years. The average balance in an American retirement accounts has risen 10% in the last three years. The median balance actually rose even more, up 25% to $59,000, according to the Federal Reserve’s 2013 Survey of Consumer Finances. That’s the good news. The bad news, however, is the fact that the number of Americans who have retirement accounts has dropped below 50%. Only about 40% of Americans in the bottom half income bracket have retirement accounts at all. In another study, the Center for Retirement Research’s “National Retirement Risk Index” shows that more than half of Americans are not saving enough for retirement. According to this study, 31% of Americans have no retirement savings, including 20% of those who are getting close to retirement age (55 or older).
It is a fact that in today’s struggling economy, millions of Americans are unable to save. Report after report has shown that America’s middle class is, at best, struggling to stay afloat. Five years after the Great Recession, it remains tough for many people to find and hold a steady job. Millions of Americans had most of their wealth tied up in their homes before the housing collapse, and they haven’t come close to a full recovery. And a lot of working families are seeing their take-home pay drop. Others are still unemployed. For too many Americans, saving what they need to for retirement is simply not an option at this time. Small Business Owners Don’t Save Enough For Retirement America’s small business owners are wealth builders and are the largest drivers of GDP and job growth. But when it comes to their personal finances, they get low marks in asset diversification and retirement planning. That’s because the vast majority of their invested wealth is tied up in their businesses, which can shortchange their personal financial futures. These findings were revealed in a recent study from CNBC and the Financial Planning Association (FPA). The study sampled financial advisors nationwide that service small business owners ages 35 to 70. And the headline finding: A whopping 70% of small business owners’ wealth is invested in their Small-business owners tend to be myopic and focus mainly on the viability and growth of their business, ignoring much else, including their long-term financial needs and saving for retirement. Yet neglecting a personal financial investment/retirement strategy and just plowing money into a business is fraught with risk. Many small business owners have their company and personal finances so intertwined they cannot separate what is what, so they can analyze their broad financial picture. Too often this means that their only way to fund retirement is to sell and cash out, which can be difficult and stressful. There is always uncertainty on how successful the owner will be in finding a buyer at the right time and price. Potential buyers may be reluctant to make an offer, especially if the company’s customers are emotionally attached to the owner. The bottom line is that small business owners, generally speaking, have not saved nearly enough for a secure retirement. Fidelity Study: Tips For Saving More For Your Retirement In 2013, Fidelity Investments did a study on all of its 401(k) accounts with assets over $1 million. What the study found was that about 28% of participants’ 401(k) balances came from their employers who match employee contributions to varying degrees. Among these large 401(k)s, most participants took full advantage of the employer’s “match” and any profit sharing. Next, Fidelity found that most individual participants in these large 401(k)s started saving for retirement in their 20s, and that they saved at least 10-15% of their annual salaries. Of those who worked for publicly-traded companies, most held a significant portion of their 401(k) in their company stock, as well as stock mutual funds. Unfortunately, many people hold too much of their company’s stock and are therefore not diversified enough. If their company’s stock price declines, that can lead to large losses. Also, Fidelity found that most of the participants in large 401(k)s did not cash-out their account balance when they changed employers. Most preferred to leave it in the former company’s 401(k) plan, transfer it to the new employer’s 401(k) plan or roll it over into an IRA. The point is, they didn’t cash out.
For those nearing retirement age that have not saved enough to retire, Fidelity had some suggestions. First, as noted above, is to max-out their 401(k) contributions. They can contribute up to $17,500 per year. If they are 50 or older, they can contribute an additional $5,500 a year. The second thing is to adjust their retirement date. If they were planning to retire at 62, they could consider retiring later, at 66 or 67. Another option would be to delay taking Social Security until they are 70 to maximize the amount they will receive from Social Security. They could also consider a part-time job and/or downsizing their home or take out a reverse mortgage. Finally, Fidelity developed a general rule of thumb for determining how much you need to save for retirement, which is at least eight times your salary by age 67. This is the minimum they recommend and caution that some people may need 10 or 12 times their salary depending on how much they plan to spend in retirement – and if they plan to retire before age 67. America Has a Retirement “Spending Problem” Achieving a secure retirement is a complex endeavor. Working-age households are charged with saving the right amount to enable an acceptable standard of living in retirement. The most commonly cited figure is that retirees will need about 70% of their working-age income to be secure in their retirement, but this can vary greatly as I will discuss below. Upon retirement, most households are faced with the daunting challenge of turning their accumulated wealth into financial security and spending down that wealth in a way that allows them to deal with a host of risks. Those risks include uncertain healthcare costs, the risk of outliving their assets, varying returns on both financial assets and housing, etc. Ultimately, a sound retirement means adept choices about both saving and spending. The ongoing debate about Americans’ saving behavior during their working years misses the equally important question of whether retirees will spend their nest egg in the right way. Unfortunately, many retirees learn that it is very difficult to reduce their spending levels after leaving the workforce. How to Not Outlive Your Retirement Savings In the retirement debate, one of the most important questions is: How much can retirees spend each year without running out of money before they run out of breath? This is a tough one, because there’s so much uncertainty. You don’t know how long you’ll live, what the inflation rate will be and what investment returns you’ll earn. Still, many financial experts have settled on a 4% annual withdrawal rate, meaning you spend 4% of your portfolio’s value in the first year of retirement and thereafter step up your annual withdrawals only in-line with inflation. While a 4% baseline withdrawal rate might seem reasonable, other financial experts disagree. Laurence Siegel, director of research for the CFA Institute Research Foundation, and M. Barton Waring, a managing director at Barclays Global, don’t think it’s that simple. They have a working paper on the topic that they’re currently circulating. Their key point: You shouldn’t expect a fixed-income stream from risky investments. “For retirees who think they might live to age 90 or so, 4% isn’t a bad number to start with. But if you don’t adjust it to your portfolio’s changing market value, you can get in trouble very quickly.”
Alternatively, to generate a predictable stream of inflation-adjusted income, you might create a “ladder” of inflation-indexed Treasury bonds with different maturities to live off of. Today, the longest-dated inflation-indexed Treasury matures in 30 years. However, I would caution against this plan today, what with interest rates near historical lows. But what if you don’t like these strategies and prefer to own some mix of stocks and bonds? Many people do own stocks and/or bonds in retirement, but doing so doesn’t guarantee a steady rate of income and exposes the portfolio to what can be significant market risks. Instead, Messrs. Siegel and Waring propose what they call an “annually recalculated virtual annuity.” The idea is to recalculate how much you can spend each year by taking your year-end portfolio value and figuring out how much you can spend over your remaining lifespan based on the current level of real interest rates and expected returns. Siegel and Waring admit that the annual calculation will result in year-to-year fluctuations in your income. To that Siegel responds, “In your working life, it’s not unusual for your income to vary, and you have to adjust your spending. In retired life, you have to do the same. Conclusions – Don’t Spend It Too Early With people living longer, there’s always the chance that you’ll outlive your savings. Siegel and Waring suggest spending only 75% of your savings until you reach age 85. The remaining 25% would be your “financial backstop” should you live beyond 85. That sounds like good advice to me. In conclusion, Americans are not perfect savers, but retirement security requires much more than just a high personal saving rate. In addition to saving more, soon-to-be retirees need to seriously consider how they can cut spending when they leave the workforce. I hope this discussion was useful to many of you. However, today’s E-Letter barely scratches the surface of retirement planning. For more advice tailored to your unique situation, feel free to call Phil Denney or Spencer Wright with any questions you may have. Even if you’re already in retirement, be sure to share this information with your children and emphasize that they need to start saving in their 20s, and not wait until their 30s or 40s. Very best regards,
Gary D. Halbert SPECIAL ARTICLES Retirement Savings Crisis: Is It Worse Than We Think? Retirement Savings Crisis: Is There an Easy Solution? Nest egg problems as wave of retirees looms
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Siegel and Waring have some ideas for those who want a predictable stream of income in retirement. For one, they recommend that you live entirely off of your savings early in retirement, while delaying Social Security until age 70. That not only maximizes your Social Security benefits, it also assures that you’ll have a healthy stream of inflation-indexed income at age 70 and above.
