April 7, 2014 (PLANSPONSOR.com) – Those saving for retirement may be able to survive on a much lower retirement income than popularly advised, according to a research paper about the subject.
The paper, “Estimating the True Cost of Retirement,” was
written by David Blanchett, head of Retirement Research for Morningstar
Investment Management, who is based in Chicago. According to Blanchett, a
common approach to estimating the total amount of savings required to fund
retirement is to first apply a generic replacement rate to pre-retirement
income (e.g., 70% to 80%) to get the desired retirement income need.
However, Blanchett finds the actual replacement rate is
likely to vary considerably by retiree household, ranging from 54% to 87%. He
notes that while a replacement rate between 70% and 80% is a “reasonable
starting place,” the actual replacement goal can vary due to a number of
variables that are dependent on differences between pre-retirement and
post-retirement expenses.
For instance, Blanchett tells PLANSPONSOR, a participant that has been annually
putting away 25% of his income for retirement is used to not spending as much
and may only need a fraction of his pre-retirement income level during
retirement. Other factors may also come into play, such as paying less in taxes
and no longer having mortgage payments because the mortgage has been paid off.
“In helping participants estimate what they’ll need for
retirement, it’s important for plan sponsors to understand the costs that will
be unique to each person,” says Blanchett. “Plan sponsors are in a great position to make use
of research about their participant population. And what they can’t get from
research, they shouldn’t be afraid to ask the participants themselves. Since
everyone is different, the variables that need to be factored in for spending
patterns will be unique to each participant.”
Health care costs can be hard to predict, says Blanchett.
Generally though, he says, research indicates people will spend more on
health care costs as they get older. For example, he cites one estimate that
for those around the age of 65, 10% of their consumption will be spent on
health care costs. Upon reaching age 85, this figure is likely to double to
20%. “Annually, medical costs will always increase more than inflation,” says
Blanchett.
In terms of factoring regular inflation into
estimates for retirement savings, Blanchett says, “Inflation is not as scary as
it’s made out to be,” adding that people do not tend to increase their spending
based on inflation and that annual inflation of health care costs is a far
greater worry.
When asked how to respond to those in the retirement
industry who say the income replacement rate needs to be in the 70% to 80%
range, Blanchett explains, “Retirement is the most expensive purchase you’re
ever going to face. But the problem is that everyone is different in their
financial situation and financial habits.”
Plan sponsors can make efforts to ensure participants have a more holistic view of their finances by offering them
financial literacy and financial wellness education, he adds.
A copy of Blanchett’s paper can be downloaded here.
April 7, 2014 (PLANSPONSOR.com) - The Insured Retirement Institute (IRI) released a new report showing Baby Boomers’ confidence in their plans for retirement continues to decline.
During
a press call to kick off National Retirement Planning Week, Danielle Holland, senior
vice president with the Insured Retirement Institute (IRI) said its recent
study showed the percentage of Baby Boomers with no to low confidence increased
from 23% in 2011 to 31% in 2014. In addition, those who said they are satisfied
economically decreased from 77% in 2013 to 65% in 2014. One-quarter of Baby
Boomers polled reported they postponed plans to retire within the last 12
months.
Holland
noted that those working with an adviser are more confident. She said it is
perhaps because, 94% of those working with, or who have worked with, an adviser
have some retirement savings compared to 68% without an adviser, and 74% of
those with an adviser have determined a savings goal, compared to 40% without
an adviser.
The
Employee Benefit Research Institute’s (EBRI) Retirement Confidence Survey (RCS)
found Americans’ confidence in their ability to afford a comfortable retirement
has recovered somewhat from the record lows of the past five years, but that
result is among workers of all ages. And, Nevin Adams, director of the American
Savings Education Council (ASEC) and co-director of the Employee Benefit Research
Institute (EBRI) Center for Research on Retirement Income, shared in the press
call that results from the RCS show retirement confidence is higher for those
with an employer-sponsored retirement plan, and workers with an employer plan
have more in savings than those without (see “Retirement Plan Offering Strongly Linked to Confidence”).
According to Rich
Linton, president of Individual Markets at ING U.S. Retirement Solutions, there
are many risks Americans do not think about when planning for retirement. He
noted ING U.S. research found more than half (57%) of retirees face unexpected
challenges, most often with managing savings and unexpected health issues. In addition,
less than half of pre-retirees (42%) and retirees (44%) have a plan to manage
their income in retirement.
Linton
pointed out the five primary retirement financial risks are longevity, health
care, market performance, inflation and withdrawal rate. Individuals have
little or no control over the first four, so an income plan is the essential
framework for preparing for retirement, Linton contended. In planning,
individuals have to account for likely health care issues, and it is important
to continue earning money on assets during retirement, he said. In addition,
one key to making appropriate withdrawals is understanding the effect of taxes.
Linton suggested everyone older than 50 should complete a retirement income
analysis, and separate savings into needs, wants and wishes for retirement, while
accounting for household shocks.
Linton
said individuals can be more retirement ready through seeking holistic advice
and guidance to minimize retirement risks, having an organized process and
framework for retirement income planning, and having a strategy for turning
savings into a steady stream of income that lasts a lifetime. They should use tools
and resources to assess retirement risks and get holistic financial view. ING
recently launched a web-based tool to help individuals have get a holistic
financial view (see “ING U.S. Launches Online Budgeting Tool”).
Brent
A. Neiser , CFP, senior director at Strategic Programs and Alliances National
Endowment for Financial Education (NEFE), pointed out a tool from NEFE,
myretirementpaycheck.org, addresses eight planning areas, and attempts to make
retirement planning more understandable. He said people observe others
preparing for and living in retirement, and they follow the example of others
in their family who may have made uninformed decisions, so getting people more
educated about retirement planning could also help those who are watching.
According
to Scott Romine, EVP and national sales manager at Jackson National Life
Distributors LLC, Jackson National Life Insurance Company and the Center for
Financial Insight surveyed investors in April 2013 and found fewer than 18% of
men and fewer than 11% of women said they have all the financial education they
need to make appropriate investing decisions. An additional 39.6% of responding
men and 33.7% of responding women reported that, while they have a basic
understanding of knowledge about financial products, terms and methods, they
would still benefit from more resources and advice to assist in making
appropriate investing decisions.
In
terms of what would make the most positive difference on their current
financial outlook, “having an adviser whom I trust and who really gets me” was
the top choice for both men (42.3%) and women (43.9%). In addition, more than
one-third of both men and women chose “having assistance in filtering through
the massive volume of educational resources available to get to the information
that impacts me” as the top factor in making a positive difference in their
financial outlook.
Presenters
also shared educational needs for particular demographics. Kevin Molloy, senior
executive director and head of Employer-Sponsored Business at AXA US, noted
that traditionally teachers have had great retirement savings resources and
tools, however there is gap between future need and future benefits. Pensions
generally replace 60% to 75% of average salary, and in 15 states, 40% of
teachers are not enrolled in Social Security. Katie Libbe, vice president of
Consumer Insights at Allianz Life, shared that its “2013 Women, Money and Power
Study” showed women think they need more money to be served by a financial
adviser. In addition, they find financial planning materials dull and boring
(see “What Women Want… in Financial Education”). They want a more fun and engaging
education experience, and like to hear case studies or stories about women like
them.
Additional
findings from the IRI study include:
As
Baby Boomers age, they continue to gain clarity about when they plan to stop
working and retire. In 2011, 35% did not know when they would retire. Today
only 17% are uncertain.
The
percentage of not-yet-retired Boomers who are planning to retire at age 70 or
later has increased each year, rising from 17% in 2011 to 28% in 2014.
Boomers
are slightly more likely to have savings for retirement than in prior years. In
2014, 80% of Boomers reported having retirement savings. Among those with savings,
about half have $250,000 or more saved.
In
2014, 55% of Boomers said they calculated a retirement savings goal, compared
to 50% in 2013. Of those who have determined a savings goal, 76% said this
calculation factors in estimated costs for health care expenses.
In
prior years, around two-thirds of Boomers believed leaving an inheritance to
loved ones was important, but only 46% of Boomers shared this view in 2014.
If
tax incentives for retirement savings—such as tax deferral—were reduced or
eliminated, nearly 40% of Boomers say they would be less likely to save for
retirement. Overall, 75% of Boomers say tax deferral is an important trait of a
retirement investment.
The
percentage of Boomers working with a financial adviser who are highly confident
in having sufficient savings to live comfortably throughout their retirement
years is more than double those who are planning for retirement on their own.
Marital
status has an effect on retirement confidence and retirement savings. While 86%
of married Boomers had savings for retirement, only 70% of unmarried Boomers had
savings for retirement.
The study report, “Boomer
Expectations for Retirement 2014,” can be found at http://www.irionline.org.