For most Americans, the right mix for retirement funding doesn’t mean million-dollar portfolios. Instead, relevant advice should include allowing for “chunky” spending, addressing the outlook for employment, avoiding unpleasant retirement surprises, and analyzing living arrangements, according to a new market intelligence report by Hearts & Wallets.

“This report, Getting Real About Retirement: Breaking Through with Better Solutions for 'Chunk or Nothing' Spending, Work & Real Estate,” examines important retirement topics, such as realities vs. expectations for retirement age, funding and spending, work capability, real estate, and advice,” said Hearts & Wallets CEO and founder, Laura Varas, as she shared some of the main findings of the report.

In addition to the traditional retirement “income-replacement” market, the report finds that financial advice should help older clients to consider retirement surprises, work capacity, living situations, and one-time spending needs (which Hearts & Wallets calls “chunk-or-nothing”), all of which are critical needs, Varas said. “By expanding the market to address work capacity, living arrangements, and chunky funding, the addressable market for “retirement income” expands from traditional definitions of $5 trillion to $15 trillion or more,” she added.

“Chunk or nothing” behavior is taking either income withdrawals of $0/less than 1% or 10% or more annually by households 65 years and older for necessity or fulfillment, Varas explained. Hearts & Wallets’ data show that this behavior is persistent over the years and is strongly exhibited by households age 65-plus who have $100,000 to under $500,000 in total investable assets, or 8.6 million U.S. households.

“Unpacking the attitudes and needs behind this “chunk or nothing behavior” is critical to building solutions so that future retirees feel safe in tapping into their nest eggs,” Varas explained. “This is especially important, given future retirees anticipate they will need to take income or withdrawals from personal assets more so than prior generations. Older adults' need to take “chunking spending” must be balanced thoughtfully when recommending annuities. Advisors who understand the needs driving this behavior can be extremely helpful to sort through options with older clients.”

Setting goals

Another important finding of the survey is that advice that helps consumers save should avoid setting goals so high that they are not motivated, Varas said. “Not everyone needs a million dollars or more to succeed in retirement,” she pointed out. “Yet, most customer advice experiences today overstate needs by using target retirement-income-replacement rates within a narrow band around 80% for income-replacement rates, according to Hearts & Wallets Inside Advice® database.”

Factoring in work-span, real estate

According to the report, future retirees anticipate drawing from more funding sources than today’s retirees with only 28% of current retirees who receive four-plus sources, compared to 48% of future retirees who expect 4-plus. Work is a funding source where expectations of future retirees are at odds with reality, according to the survey. Too many future retirees anticipate having work as an income source, and those who will be able to work often underestimate the role that work can play, based on data from current retirees. Since tracking began in 2010, employment has been part of the income mix for 1 in 5 retired households.

Many households also have equity in homes and other real estate, which is equal to, or greater than their investable assets, the report noted. Yet, eight out of 10 advice experiences today do not address real estate. Over three quarters (79%) of households age 65-plus own their primary homes, with rising valuations and low or paid-off mortgages. Hearts & Wallets estimates that 47% (17.3 million) of households age 65-plus have at least as much net equity in real estate as they do investable assets.

But as the report mentioned previously, most advice experiences fail to address the issue of real estate. What might be some of the reasons for this failure? “Eight in 10 advice experiences today do not address real estate and future living arrangement options for older adults,” explained Varas, “and firms and advisors are probably the best to say why there’s this gap. But it’s important to address for the industry, as well as the well-being of older adults. Hearts & Wallets estimates that 47% of households age 65-plus (17.3 million) have at least as much net equity in real estate as investable assets. And housing is the #1 expense faced by U.S. households.”

Households with people who are 65-plus are averse to moving but sometimes, prior living arrangements aren’t adequate for aging adults, Varas added. Although only 1 of 10 households age 65-plus is highly concerned about their ability to “manage finances as they age,” their younger loved ones are increasingly worried, she said.

The impact of advice

Another survey finding is that advice can have a positive impact on households, with the good surprise of” enjoy having more time and less stress” being higher for professionally advised households than it is for unadvised households that are in the $100,000 to under $3 million investable-asset ranges. So, why is this the case? “Investing takes time and a level of expertise, and with professionals handling this aspect, retirees may have more time for other activities,” explained Varas. “It might be that professionally advised consumers believe they have their investing needs taken care of by advisors, so they can focus on their personal needs.”

Funding floor metrics

The level of financial wellness to stave off the worst controllable surprises in retirement is fairly minimal, at 3 to 5 times assets-to-income, the report pointed out. The incidence of being “forced to live more frugally than expected” is flat until retirement-income- replacement rates fall below 50% or less. Most customer-advice experiences today overstate clients’ needs by using target retirement- income- replacement rates within a narrow band around 80% for income-replacement rates, according to Hearts & Wallets Inside Advice® database.

'Sizing' opportunities

The report also pointed out that certain often-neglected advice areas of “retirement income” are each about $15 trillion, or three times traditional “retirement income” market definitions according to Hearts & Wallets market sizing. The first area, more personalized human-capital planning, would help the 88.1 million households 65 years of age and older with $19.7 trillion. The second, adding living arrangements to advice, would help 23.3 million of the 65-plus-year households with $14.1 trillion. And the third, solving for the needs driving “chunk or nothing” spending behavior – which involves either large one-time expenditures or take nothing or very little – would help 18.9 million 65-plus-year households with $15.4 trillion.

“Saving one or two million dollars for retirement is an unattainable goal for most Americans,” said Varas. “The most important goal is avoiding poverty as an older adult. In addition to income replacement, financial advice should help consumers to consider retirement surprises, work capacity, living situations and ‘chunk-or-nothing’ spending. A high priority should be on inspiring saving so that the 70.5 million households of all ages with less than $50,000 in assets have a minimum safety net as they age. Firms that can understand, size, and build for these consumer behaviors will carve out niche products and advice experiences in the large and growing U.S. retirement market.”

The Hearts & Wallets retirement spending report is based on the Hearts & Wallets Investor Quantitative Database. The latest wave was fielded from Sept. 11 – Oct. 6, 2023, with 5,846 U.S. households. The report also draws from the Hearts & Wallets Explore Qualitative™ (EQ) database with 118 topics studied since 2010, and the Inside Advice® database, collaborative benchmarking of advice experiences.

Ayo Mseka has more than 30 years of experience reporting on the financial services industry. She formerly served as editor-in-chief of NAIFA’s Advisor Today magazine. Contact her at [email protected]. 

© Entire contents copyright 2024 by InsuranceNewsNet.com Inc. All rights reserved. No part of this article may be reprinted without the expressed written consent from InsuranceNewsNet.com.