Thursday, July 29, 2010
Re-thinking Retirement: The risk of out-living your retirement assets
By Bill Smith
The “Baby Boomers” generation consists of those whom were born between the years of 1946 and 1964. Currently, the baby boomers make up about 28% of the total population of the United States, or around 76 million people. Furthermore, of the 72 million family households in the U.S., around 34 million of them are baby boomer households. Lastly, a baby boomer turns 50 every 8.5 seconds!
To say the least, the baby boomer generation is slowly but surely leaving the workforce and retiring. In a recent study done by Allianz Life Insurance Company, several key findings were revealed in regards to the preparation and expectations of retirement amongst the baby boom population. I would like to take an opportunity to elaborate on each finding separately and provide some insight as to some strategies that may help you get past these common hurdles.
The study outlines 5 main discoveries and how each effect the steps one may make to execute their retirement goals. The main backdrop for all 5 of the concerns revolves around:
• having reduced sources of income
• the risk of longevity (outliving your money)
• market volatility
Reduced Sources of Income
In previous generations, retirees could rely on defined benefit plans as a source of income during their retirement years. These types of plans are now scarcely seen and much harder to come by in our current era. Social Security was also a much larger factor in previous years. However, as Social Security continues to erode, retirees can no longer rely on their S.S. benefits to supplement their retirement income on its own.
Increasing Life Expectancy
When Social Security was established in 1935, average life expectancy was 61.7 years and people retired on average at age 65. The projected average life expectancy has now risen to 78.3 years. People are living longer than ever before and are now forced to supplement their retirement income for a longer period of time. The hurdle comes in picking up where Social Security leaves off.
In 2008 and the first quarter of 2009, many investors lost over 30% of their entire portfolio in a very short period of time. While the market has recovered for the most part, many are still not back to where they were before. Those relying on their portfolio to supplement their retirement income are now scared that they may lose money they cannot afford to lose! For most investors, the fear of losing even more in the coming years is now larger than ever. Many believe we are still in for an extended downturn and unprecedented amounts of market volatility for the extended future.
These three problems can spell disaster for those who are planning on retiring in the immediate future. Without “re-thinking” how you might plan for your retirement, you may not make it through successfully. The findings that Allianz made were both common and alarming at the same time.
Discovery #1: The Retirement Crisis
Financing a comfortable retirement has never been an easy task, but now more than ever, retirees are facing the hard truth of knowing they must work longer and do not have enough money saved up. When asked whether or not they believed this country is in a retirement crisis, the respondents of this study answered, “Yes” at an astonishing rate of 92%. Due to an increasing ratio of baby boomers leaving the workforce and drawing on traditional sources of retirement income (such as Social Security, pensions, 401(k)’s and IRA’s), many people are now worried that these funds will begin to run out.
This idea and fear makes it all the more important that retirees and those who plan on retiring save more money and lose less. According to Jim Jubak of MSN Money, market losses get recouped in market rallies. However, what you lose that can’t be replaced is time. As we discuss in our educational workshops, it’s not about making money or losing money in the stock market, but more about the timing that is involved. When it comes time to draw on your retirement assets, you need to know that they will be there for you.
Discovery #2: The 5 Distinct Financial “Personalities”
The study identifies 5 main personalities that an investor who is retired or close to retirement can identify with. The majority of retirees (79%) fall in to one of 3 personalities: “Overwhelmed”, “Iconic” or “Resilient”.
An “overwhelmed” investor had the largest segment at 32% of those who participated in the study. This personality type feels unprepared for retirement and unsure of if and/or when they will be able to retire. They expect to rely heavily on Social Security or to simply continue working. Like we discuss in our workshops, in the financial terms, this investor would be classified in “survival mode” (spending more than 5% of your retirement assets/savings per year).
If you are an “iconic” investor (20% of the study), you are most likely receiving a pension or a fixed income retirement payment of some sort. You may be confident your source of income will last but you see that you may have to reduce some spending and make a few changes. If spending more during retirement means leaving a smaller inheritance for your heirs, you are still going to be OK.
Lastly, around 27% of investors fall in to the “resilient” category. These investors tend to be still working full-time and have only moderate asset and income accumulation. 1/5th have been affected by a job-less and remain worried about the next economic depression. While you still plan ahead, you also realize that working longer may be in the cards. Mostly, you are concerned about out-living your income.
With all three personalities, traditional investment types and stock market volatility play a huge part of your successes and/or failures during your retirement years.
Discovery #3: Outliving Your Money
USA Today’s MONEY Section recently released a study done in regards to workers’ retirement savings running out too soon. The study said that about 1/3 of middle-income workers will deplete their savings after 20 years or retirement. Furthermore, 64% of workers making less than $30,000 a year will run out of money within 10 years of retirement!
With increasing life expectancies, we are spending more time retired than ever before. This means we have to fund more years of retirement than ever before, or, continue working longer than we expected or wanted to! In the Allianz study, 61% of people surveyed said they were actually more afraid of running out of money than they were of death.
Because of the decreasing likelihood that younger, middle-aged workers will get their full due amount of Social Security, workers can no longer rely on this payment as a full supplement to their allotted savings. Many people are now forced to save longer and work longer to have enough money during their retirement.
Discovery #4: Economic Downturn
After the market turmoil and decline of late 2008 – early 2009, many investors behavior shifted. Most realized that they were not in as much control as they had thought they were. Almost every investor who had the majority of their net worth at risk reported a significant drop in value over a very short period of time. Many of those investors still do not have their entire nest egg back today.
Ultimately, the economic downturn and the newly installed fear in the eyes of those investors who had the majority of their dollars at risk in the market made for a change in investment strategy. 51% of the people surveyed in Allianz’ study realized that a comfortable retirement (regardless of pensions, Social Security, etc.) is not guaranteed. Another 46% decided that protecting their assets was more important.
While growing your assets leading up to retirement might be top of mind for most, protection of assets has become much more important as of late.
Discovery #5: Annuity-like Solutions
The top three concerns most investors have in regards to retirement are outliving their assets, looking beyond defined benefit plans and Social Security and protecting their assets from further market downturn. In terms of those surveyed, the new normal had changed from “growth” as the most important factor to “guaranteeing the protection from loss”.
80% of investors now prefer a product that would guarantee a 4% return without any risk of loss over an 8% return with market loss vulnerability. The majority of investors (77% of the mass affluent) in the study determined that they would like to choose an annuity-like product (moderate growth, monthly income, guaranteed for life, limited access to lump-sum withdrawals) over a similar vehicle that provides total liquidity but risks running out or money or losing money.
In conclusion, we see a massive shift occurring in the way retirement planning is being handled. It is important for investors who are nearing retirement or newly retired to seek professional advice in regards to their investment strategies. As life expectancies continue to rise, Social Security benefits and defined benefit plans continue to become scarcer and the market continues to become more volatile, many of the investment strategies of the past no longer apply to certain situations.
If you have worried about some of the problems that were mentioned in this study, you owe it to yourself to seek professional advice from an unbiased source. Educating yourself about your options and having a trusted financial planner assess your situation may be in your best interests. As we always say, “The journey of a thousand miles begins with the first step…and that first step in retirement is to educate yourself.”
Related Articles to this blog:
• Will you outlive your retirement capital? – AllBusiness.com
• Boomers: Don’t outlive your money – ConsumerAffairs.com,http://www.consumeraffairs.com/boomerific/2010/016_boomers_outlive_money.html
• Running out of money worse than death – AARP, http://www.aarp.org/work/retirement-planning/info-06-2010/running_out_of_money_worse_than_death.html
• Take Steps To Avoid Outliving Your Nest Egg – CNBC, http://www.cnbc.com/id/26872945/Take_Steps_To_Avoid_Outliving_Your_Nest_Egg
1. Article paraphrased and commented on from: Allianz Life Insurance Company, “Reclaiming the Future: White Paper”
2. Love to Know Seniors, “Baby Boomer Statistics”, http://seniors.lovetoknow.com/Baby_Boomer_Statistics
3. MSN Money, “Retirement Crisis: From Bad to Worse”, Jim Jubak, http://articles.moneycentral.msn.com/Investing/JubaksJournal/RetirementCrisisFromBadToWorse.aspx