The past two years have been difficult to navigate. Many were impacted by the pandemic. Some 30 million Americans were laid off, furloughed, took distributions or loans from retirement accounts and more. Whether managing through the pandemic with financial successes or maybe hitting a few snags, I encourage you to use the New Year to refresh or hit reset and get back on track with your retirement planning. Two of the most common retirement goals are to maintain a comfortable standard of living and not being a financial burden to others. Consider the following obstacles and opportunities in your planning.
A recent study by BlackRock and the Economic Benefit Research Institute (EBRI) illustrates interesting trends and offers insights for future planning. Over 80% of retirees have only moderately touched their assets, even after two decades of retirement. Approximately one-third of them have seen their assets grow. However, the 2021 BlackRock DC Pulse Survey shows increasing obstacles to retirement success, including a shifting market environment, as well as sudden demographic changes. These will require good saving behavior, prudent investing and steady retirement cash flow.
What are the obstacles?
- A decline in pension plans: 42% of retirees in the EBRI study had a defined benefit pension plan. However, pension plans have become rare with the proliferation of defined-contribution 401k programs.
- Anticipated Social Security benefits: Social Security has been a significant part of retirement income over the past several years. However, pressure on the system may decrease benefits for future retirees including having to wait until you’re older to draw. Currently, the average monthly retirement benefit is about $1,559. The maximum benefit is about $3,345 for those with maximum covered earnings (currently $147,000) and retiring at full retirement age.
- Lower expected investment returns: A decline in economic growth suggests lower investment returns. The next decade may return less than the prior one. As of Sept. 30, 2021, the U.S. stock market returned almost 17%, and U.S. bonds have returned about 4% annually for the past ten years. Forecasters expect returns to be about half those rates for the coming decade.
- Savings: Future retirees may have to rely more on their savings and need innovative withdrawal strategies to maintain their living standards.
- Longer life spans: Longer life expectancies may require that money works harder and lasts longer.
Opportunities to reset
- Refresh your financial plan: Some people have trimmed their needs for retirement, such as “simpler living” following COVID-19. Others have considered health care costs in retirement and assisted living. Fidelity estimates an average couple, at approximately 65 years of age, needs $300,000 for health care (excluding dental and long-term care). Your financial needs determine the size of the retirement nest egg required.
- Retirement account balances: Average retirement account balances by age group, per the EBRI study, were as follows:
- People in their 20s: $50,600
- People in their 30s: $210,900
- People in their 40s: $256,200
- People in their 50s: $356,600
- People 61 and older: $316,700.
Everyone is different, and these are just indicators. In addition, not all this wealth was in 401k and IRA accounts. About 40% was in after-tax savings. It’s wise to diversify the taxation of your future retirement checks.
- Cash reserve funds: Have plenty stocked away for emergencies. Participants in the survey had a high connection between short-term and long-term finances. Fifty-six percent of people said they would save more for retirement if they had adequate emergency funds.
- Trust and responsibility: Ninety-six percent of employers feel responsible for the retirement preparedness and overall financial well-being of their employees. There are advantages to the “automatic features” of 401k plan designs – auto-enrollment, increasing contributions, rebalancing and target-date funds – which provide discipline, convenience and management. Employees should also increase their investment knowledge to make smart decisions with non-401k accounts, real estate, inheritance, etc.
- Recognize gender differences in retirement savings: The study also suggested that women are more likely to say they are unsure if they’re on track for retirement. Concerns about outliving their savings may influence this. Women prefer saving more now, so they don’t have to scale back in retirement. On the other hand, the guys might say “I’ll save more in the future.” Recognize that we’re human – we have biases and money is emotional.
Surveys like the ones mentioned in this article are beneficial for exploring issues and sharing insights to help you make intelligent money decisions. May this sage advice help you secure your future wisely.