Five Ways to Change Your Clients’ Retirement Math
|By Mark Miller|
|Penton Business Media|
We've all seen the studies – one seems to land on my desk once or twice a week. “Americans are living longer.” “Fewer have defined benefit pensions.” “The value of
Just a couple recent data points:
--Working American households may experience a potential income drop of 28 percent in retirement, and nearly four-in-ten (38 percent) retiree households won't have sufficient income to cover their monthly expenses, according to a Fidelity Investments survey of more than 2,800 adults.
--Americans' confidence that they'll be able to retire comfortably is at historically low levels, due to worries about jobs and debt, according to the 2012
haven't tried to calculate how much money they will need for retirement.
--Even among the affluent, 66 percent of women and 54 percent of men are worried that they won't have sufficient assets to last through their lifetime, according to the most recent
You may have clients who share these worries. Yet there are ways to change the retirement math, even for people close to retirement. This is true especially for those who may not be on track for retirement success but are “within striking distance,” as
If you have clients who fit that description, consider the following ways to get them on track. These aren't easy, magic-bullet solutions, but basic blocking-and-tackling ideas that can have very dramatic impact on retirement success.
1: Scrub the Expense Assumptions
Many financial services companies and planners adhere to the rule of thumb that retirees should plan to replace 80 percent of working income in retirement. Many baby boomers will fall short of that. For instance,
Just as important, the 80 percent rule-of-thumb is no more than a rough estimate. For example, it doesn’t take into account unforeseen spending needs such as higher health care expenses or a long-term care insurance policy. At the same time, the rule doesn’t recognize that some expenses might shrink or disappear entirely, such as commuting or maintaining a business wardrobe.
It also sidesteps some key questions people should be asking themselves in tough economic times: What is the lifestyle I want? How much will I need to spend on basics? What can I afford to spend?
A recent EBRI analysis concluded that the median retired household spends about 80 percent of what working households spend. But that's just the median – many spent more or less.
Just as important, EBRI found that overall spending in retirement falls with age -- which means that a retiree won't need a constant replacement rate of pre-retirement income.
A better approach is to create a careful zero-based budget for projected expenditures over time based on the client's lifestyle expectations, and discuss alternatives that could reduce costs in key areas, such as housing (see retirement math suggestion No. 2, below).
2: Tap Home Equity
Real estate is a key asset for most older Americans – even in the wake of the housing crash. Eighty percent of Americans over age 65 are homeowners, according to the Joint Center
for Housing Studies at
Downsizing is the best way to do it. Most homeowners will need to sell at a lower price than they would have expected a few years ago -- but they'll be able to buy at lower prices, too. What's more, an improving economy should unleash a great deal of pent-up demand among young buyers who have been forced to hold off on home purchases over the next few years as employment and incomes rise.
Most downsizing moves occur close to home. In 2010, just 1.6 percent of retirees between age 55 and 65 moved across state lines, according to an analysis of
Reverse mortgages offer a second option – with caveats. I'm not a fan of adding debt in retirement, and traditional reverse loans carry heavy fees. But a relatively new lower-cost option introduced last year could make sense in some cases.
The Saver HECM (Home Equity Conversion Mortgage) is administered by the federal government, just like a standard reverse loan. But the amount that can be borrowed is smaller, and Saver HECMs can be used as a flexible line of credit. Saver HECMs also have far lower costs: an upfront premium of only 0.01 percent of the property's value, or HUD's loan limit, whichever is less, versus the standard loan's 2 percent.
Some planning experts – including
3: Work Longer
It's easier said than done in a tough economy, but working longer can have a nearly magical effect on retirement success. Working longer means fewer years relying on nest eggs to fund retirement, more years of contributions to retirement accounts and higher monthly
Income annuities offer another path to mitigating longevity risk. The single premium income annuity (SPIA) offers a simple proposition: turn over a chunk of cash to an insurance company, which then sends your client a monthly check for life. The latest twist – and one that bears watching – is the longevity policy - essentially a deferred annuity that can be bought well ahead of retirement with payouts delayed to an advanced age.
It's a very specific hedge against longevity risk; the downside, of course, is that clients might never see a dime of it if they don't make it to advanced age. Nonetheless, longevity policies are far less expensive than SPIAs. For example,
SPIA critics point out important downsides, including lack of flexibility and liquidity and inadequate diversification that comes from relying on a single insurance carrier. Moreover, current ultra-low interest rates makes all types of income annuities more expensive.
5: Boost Savings
At the risk of stating the obvious, encourage your clients – especially younger ones – to sock it away. Vanguard research shows that getting an early start in life on retirement saving, and the rate of contribution, have a far larger impact on retirement success than market returns or asset allocation. For example, Vanguard found that saving 9 percent starting at age 25 in a moderate allocation resulted in a higher median ending balance than saving 6 percent in a more aggressive allocation.
That's an important consideration in light of the growth of auto-enrollment programs in workplace retirement plans, where most default contribution rates are set at 3 percent. As the saying goes – control what you can control, and the rest will take care of itself.
|Copyright:||© 2012 Penton Media|