Retirement-the word used to conjure up images of leisure, travel, golf, new hobbies, or spending time with grandkids. But today, when people think about their retirement, they just worry. The prospect of a “happily ever after” retirement for many Americans is becoming more and more unlikely.
Consider this from the Boston College Center for Retirement Research & US Senate Committee on Health Education Labor & Pension in a work paper titled, “The Retirement Crisis and a Plan to Solve It,” July 2012. “American workers are $6.6 trillion dollars short of what they need to retire comfortably. That is enough dollars that, if lined up end to end, would stretch to the moon and back 1,000 times and still leave enough left over to pay NASA’s budget for the next eight decades.”
“To maintain living standards into old age we need roughly 20 times our annual income in financial wealth.” (Huff Post Business: The Looming Retirement Crisis and What To Do About It, July 24, 2012.)
According to a new study from Fidelity Investments, “The typical US worker would face as much as a $2,100 a month shortfall during retirement if current trends continue.” (USA Today, September 8, 2012.)
To complicate retirement readiness for private sector workers, the risk for accumulation and distribution has shifted away from traditional defined benefit pension plans to the very different defined contribution plans, like 401k’s. In short, the traditional pension plan is disappearing. “In 1980, some 39% of private-sector workers had a pension that guaranteed a steady payout during retirement. Today that number stands closer to 15%.” (Employee Benefit Research Institute 2013, Washington D.C.)
The Los Angeles Times reported about public sector defined benefit pension plans in an article titled “Government Pensions in Cross Hairs”, April 23, 2010 noted, “Pension consultant Girard Miller told California’s Little Hoover Commission that state and local government bodies in California have $325 billion in unfunded pension liabilities, which works out to $22,000 for every single working adult in California.”
Further, according to a report from Stanford University, “California’s three biggest pension funds are $500 billion short of meeting future retiree benefit obligations.” (Bloomberg: California Pensions $500 Billion Short of Liabilities, April 5, 2010.)
And what about the health of Social Security? “In 1950, each retiree’s Social Security benefit was paid for by 16 US workers. In 2010, each retiree’s Social Security benefit was paid for by approximately 3.3 US workers. By 2025, it is projected that there will be approximately 2 U.S. workers for each retiree.” (www.GAO.gov: A Message From the Secretary of the Treasury.)
These are alarming facts from well-respected sources. For many, the dream of a secure retirement is slipping out of reach. Low investment returns, the financial crisis, the housing bust along with rising healthcare costs all point toward smaller nest eggs than they’d hoped for. At the same time, we’re living longer. Many could live 30 years in retirement!
These findings urge pre-retires to pay more attention to their level of retirement readiness. Most conclude that saving more money is the answer. This is not necessarily correct! Adequate saving is important, but there is another question that is not being asked by pre-retirees.
The question is, “How and at what level of efficiency does my retirement nest egg convert to retirement income when I retire?” This is a question of asset utilization and efficiency rather than simply accumulating a larger asset balance. Most will find the answer to this question both enlightening and engaging. For those behind in their savings goals, they will find the answers inspiring and hopeful.
Let me explain. Two pre-retirees can achieve dramatically different levels of retirement income simply by how they position their assets in pre-retirement. If one takes an “investment only” approach, like a 401k, one can take 3-4% of the asset each year for retirement income with a reasonable expectation that one will not run out. If the other takes a more balanced or integrated approach, by combining investments and actuarial science in pre-retirement, one may be able to take 7-13% of the asset each year for retirement income. That could result in double the income in retirement!
In short, the later retiree achieved dramatically more income in retirement and yet they both saved the same. How can this be and how can one position them selves this way?
Dr. Wade Pfau Ph.D., CFA, is a Professor of Retirement Income at The American College for Financial Services in Bryn Mawr, PA. He holds a doctorate in economics from Princeton University and publishes frequently in a wide variety of academic and practitioner research journals. He hosts the Retirement Researcher website, and is a monthly columnist for Advisor Perspectives, a RetireMentor for MarketWatch, a contributor to Forbes, and an Expert Panelist for the Wall Street Journal. His research has been discussed in outlets including the print editions of The Economist, New York Times, Wall Street Journal, and Money Magazine.
Dr. Pfau recently published a whitepaper (5/15/2015) titled, “Optimizing Retirement Income by Combining Actuarial Science and Investments.” His research covers the aforementioned assertions and provides valuable insights for pre-retirees anxious to get more from less. Read Dr. Pfau’s whitepaper by downloading it from my website (www.TheEstateMD.com). Simply enter the Learning Center and click on Resource Materials.
To learn more regarding how to structure an integrated retirement income strategy for yourself, contact my office for a no cost or obligation one-hour consultation. These insights can provide an increased measure of financial peace!