New research shows a growing gap between when people think they want to retire and when they do retire. Studies show that the average age younger respondents thought they’d retire was 62 and older respondents trending beyond 65. Yet, the actual average age of retirement is closer to 67.
Plan Sponsors may want to consider addressing common misconceptions plan participants have when looking to planning educational resources. Three of the most common misconceptions about retirement planning are 1)budgeting only to prepare; 2) longevity missteps; and 3) amounts over accounts. In short, people don’t know how to recreate their paycheck, how to mitigate longevity risk, and often miss the importance of starting early.
Recreating a paycheck in retirement requires dual budgeting. Many clients think that the task of budgeting is for how to get to retirement not how to live in it as well. Many retirees do not have a plan for how they’ll spend their money once they’ve reached retirement. They may be pinching pennies (and feeling the pain) when they don’t need to. They may not have factored in a change in cost of living due to relocation for grandchildren or for aging in place.
People may have been advised to plan to spend down their assets in sequential order — starting with their taxable brokerage accounts, next their tax-deferred retirement accounts and finally any tax-exempt accounts. But that approach can have tax consequences and may not be the right fit for many recent retirees. People who are receiving passive income through bonuses or real estate options may need other options, such as a cash spend down strategy, a plan that gives them an idea of when they’ll need to dig into their principle. Perhaps one of the larger misses that people make when it comes to retirement income planning is knowing when to start: they need to assess, create, and refine their spend down strategy five to ten years before they reach their goal age of retirement.
Mitigating longevity risk involves both managing and monitoring risk. In addition to creating the right budget at the right time, people may be missing an important element of retirement planning: longevity. Retiring at 67 for three similarly financially situated people of different races may mean different amounts of retirement savings, based on life expectancy (higher for those of Hispanic genetics than those of White or Black races). And, in one survey 11% listed “retiring too early” as a chief regret.
New research shows a growing gap between when people think they want to retire and when they do retire. Studies show that the average age younger respondents thought they’d retire was 62 and older respondents trending beyond 65. Yet, the actual average age of retirement is closer to 67.
The risk of outliving retirement savings is a top concern among many planning for retirement. As with any investing risk, it can’t be eliminated. It can only be managed through asset allocation, diversification, and prudent planning.
There are a few aspects of longevity of risk that can be assessed: some ethnic and racial differences can be seen in longevity. This is also true for location. According to a recent report, Hispanics in the United States have a significantly higher life expectancy of 81.8 years, notably higher than Non-Hispanic whites, at 78.5 years and non-Hispanic African-Americans at 74.8 years. That's 6 years of additional retirement life for Hispanics than African-Americans. Apparently, according to the Robert Wood Johnson Foundation, where you live also may impact life expectancy. That Foundation found that folks in the South tended to have shorter life expectancies than those in the North.
However, changes to some assets and retirement products may provide new options for managing longevity risk. For example, annuities provide a guaranteed retirement income, which means neither the investor nor the spouse can outlive those funds. Annuities can help provide confidence to many investors that they will have a guaranteed income during their retirement. That guarantee can help them budget and make major decisions (like whether to move to a new location). But the individuals should carefully consider the tax consequences of annuities.
Benefits of saving early: not just amounts, accounts. One key is to demystify the benefits of saving early. Time is an investors single greatest asset when it comes to retirement planning. That’s why the most important employees is not how, but when? This is because compounding interest works like magic: employees get the benefit of their money making money. Some people may want to work through options and case studies to grasp the most advantageous way to capture compounding interest for their retirement planning.
Investments aren’t the only aspect of a retirement plan that can compound interest. Credit card or other debt can also build on itself. Preventing debt accumulation through structuring savings and planning investments can be another benefit to saving early. Maximizing savings might include how someone prioritizes savings accounts, including starting on an emergency fund before taking on debt, such as a new car.
Starting early may also be a key benefit for those without access to a 401(k) through their employer. Contributions to an IRA are made after taxes are taken out of income, unlike a 401(k) amounting to less of a tax advantage. Some investors may think they can use IRAs, specifically Roth IRAs as an emergency account, allowing them to replace borrowed funds later. This misses some important tax concerns.
One final aspect of starting early to consider is that an early start allows for course corrections. A solid investment plan involves not only the right amounts but the right accounts. Beginning early allows for plan participants to work through plans, make changes and adjustments, and allow for unforeseen events.
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.
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