My Dad sat on an old three-legged stool in his workshop while examining the brakes on several old Fords we restored and enjoyed working in the 60’s and 70’s. As a child, I spent many years being his “tool runner.” These are fond memories. As I grew up I acquired a fond hobby of working on old classic cars. Looking back, in addition to this great love, many words of wisdom were gleaned as I kneeled next to my Dad on that old three-legged stool.
For decades, many financial professionals used the concept of a three-legged stool to describe the three most common sources of retirement income: Social Security, an employer’s retirement or pension plan and personal savings. If you are a private sector American worker hovering in the 40-60 age category, how confident are you in your prospects for a “happily ever after” retirement?
One does not have to dig too deeply to recognize the shakiness of the proverbial three-legged stool for many prospective retirees today. Even if you feel you have accumulated a significant nest egg of over $1,000,000, I think you will be surprised and the shakiness of your own stool.
First, do your own research regarding Social Security. Based on the June 2013 annual Trustee’s Report, the Social Security trust fund will be exhausted by 2033. After 2033, income will cover just 77% of scheduled payments. Our Social Security system needs help, but few politicians have had the courage to take it on and so they keep kicking any potential fixes down the retirement road.
Second, since 1979, significant changes have occurred in the types of employment-based retirement plans. In short, Defined Benefit Pension Plans in the private sector have all but evaporated while Defined Contribution Plans like 401k’s have soared. News Flash! These plans are not the same! Our popular 401k Plans from the early 1980’s lack the essential element of actuarial science, meaning there are no lifetime income guarantees with these pre-tax plans. These plans are simply a pot of accumulated pre-tax dollars you are left to position for retirement income hoping it will not run out.
Over that last 30-40 years, there has been a major transfer of risk and responsibility for an individual’s retirement from the employer to the employee. I call it a YOYO Retirement. You are On Your Own! Unfortunately, much of this transfer has occurred with little to no employee education regarding how to take a large pre-tax asset and convert it to income. Ask yourself, how much prospective retirement income help you gotten received from your Human Resource Department on charting an effective course with your 401k, 403b, 457, etc…? Better yet, how much schooling has your existing financial advisor provided in terms of navigating this transition? That’s what I thought!
Third, is personal savings. This leg was only supposed to be needed if the other two legs faltered. Beyond employer retirement plans, there are Individual Retirement Accounts (IRAs), both Traditional, Simple and Roth, and a range of other after-tax investments one can engage. Unfortunately, many Americans are woefully behind in their savings plans.
US News & World Report, March 19, 2013, found that “28% of Americans say they have less than $1,000 saved for retirement.” The 2013 Retirement Confidence Survey by the Employee Benefit Research Institute found that “60% of workers report they have saved less than $25,000 for retirement (excluding the value of their home and pension plans).”
Understandably, many pre-retirees feel an unsettling angst when contemplating any hopes for retirement recognizing their own three-legged stool might be unsteady.
But wait, you are different and have practiced the art of delayed gratification. Congratulations! You have accumulated a sizable retirement account outside your employer defined contribution plan. You may be shocked how little it might yield in withdrawal rate income if you expectedly leave it exposed in the market as a hedge against inflation.
The best research today suggests a retiree should not take more than 3.5% from his or her portfolio each year. Some research suggests a mere 2.8%! Otherwise, there is a strong probability you may run out of money. In short, the old 4% Rule is dead. Simply look at the 1980’s 10 year US Treasury Rates versus today. We are certainly living in a historic low-interest rate environment with increased global market volatility. Still not convinced? Google, “Say Good-bye to the 4% Rule” and read a range of impressive, independent articles on the subject. Also, try out the Retirement Nest Egg Calculator on the Vangard.com Website.
An approximate 3.5% income rule creates another pre-retiree challenge as it will be very difficult to accumulate sufficient assets to enjoy a “happily ever after” retirement. For example, a $1,000,000 unit of retirement nest egg will only yield a paltry $35,000 of annual retirement income! This income is woefully short of most expectations. This all results from the issue of withdrawal rate risk which attempts to solve the problem of sequencing of returns risk in a fluctuating market environment.
This is a great starting point to help pre-retirees get centered on what matters most with respect to generating significantly more retirement income from the nest egg they have accumulated. We have used this check list in numerous educational workshops. It's always a great time to teach and train on these important elements.
With a mere $500,000 saved, this will only generate about $1,500 per month given the lower withdrawal rules. Add Social Security to this and one is still forced to live on a fraction of pre-retirement income. And what about extended life expectancy and the threat of inflation? Most pre-retirees are not aware of this reality, which is why developing a more robust retirement income planning strategy is necessary.
Fortunately, there are proven strategies that can combat withdrawal rate risk, mitigate return sequencing problems and restore actuarial science to a pre-retiree’s retirement game plan. If pre-retirees take action, they can dramatically change the financial trajectory of their retirement income often by 30-50%, without saving any more money or taking on additional risk.
The check-up asks participants 10 important retirement income questions. Workshop attendees respond privately with a 1, 2, or 3 on their individual check sheets. When answering each question, 1 means the attendee is “absolutely confident”, 2 means “somewhat confident” and 3 means “not very confident.”
At the end, attendees add up their scores to determine if their prospective “retirement income is healthy” (Score: 10), “need a doctor” (Score: 11-20) or if their retirement income “needs to be rushed to the emergency room” (Score: 21-30). The levity generates chuckles, which are powerful motivators to move forward with what matters most.
Add up your score!
Being an active learner in one’s financial life is essential for success. Abdication is not an option! Yes, the three-legged retirement income stool has changed dramatically, but there are answers to increasing one’s retirement income, often without saving any more money.
Take ownership of your financial future today! Taking the Retirement Income Wellness Check-Up is a great start. Doing so will give you a more credible claim on financial peace.
Mark McKell is the Managing Partner of McKell Partners, a full-service wealth management practice. Its mission is to “Help individuals and families experience financial peace so they can focus their lives on what matters most." Mark is focused on providing the personalized financial services retirees and pre-retirees need to combat the risks associated with retirement.
With a BS in Accounting from Brigham Young University, Mark has worked as a financial professional since 1985 and has acquired a depth and breadth of knowledge that comes from over three decades of experience in a variety of financial arenas. Those arenas range from public accounting with Ernst & Young to positions as a corporate controller, CFO, and CEO. In 2001, he decided to devote his experience and training to helping people with their personal financial goals.
Away from work, Mark is a dedicated family man and committed to his church, country and community. He and his wife, Susan, have been married for over 35 years, and have four married children including six wonderful grandchildren.
To learn more about McKell Partners and their services, simply visit mckellpartners.com. Visit Mark’s personal blog at markmckell.com where he shares his thoughts about what matter most.