People are living longer. At age 65, the chances of living to age 75 are 79 percent for men and 85 percent for women.1
Most individuals should plan for their retirement funds to last until age 90 or beyond. Statistics related to retirement readiness are plentiful, and they all point to the same staggering conclusion: Americans, generally, are not adequately saving for retirement … if they are saving at all.
As many as 60 percent of American workers have access to an employer-sponsored defined contribution plan,2
but 59 percent of working Americans ages 21-64 have no retirement account.3
Even among the age group closest to retirement (ages 55-64), only 48.7 percent have a retirement account. This percentage is virtually the same as those in the 35-54 range. It’s no wonder that only 20 percent of Americans are confident in their savings level.4
To help guide your clients to better savings habits, review box 12 of the W-2 at tax time to determine their contribution level to employer plans. Explain to them the tax savings as well as the opportunities provided by company matches (when available). For those clients with-out employer plans, individual retirement accounts (IRAs) and Roth IRAs are available to save on pre-tax or post-tax monies, depending on their needs. Certain tax savings and credits also may be available for lower-income taxpayers to incentivize them to start saving. Keep in mind that retirement account balances are typically lower for women, yet they retire younger, live longer, and may have higher health care costs. Savings are particularly important for them.
The average retirement ages are 64 for men and 62 for women.5
This means that the average retiree may not receive their full Social Security benefit because full retirement age is currently between 65 and 67. Retiring before full retirement age means the lifetime benefit is reduced by as much as 30 percent under current rules. Not everyone retiring at these early ages do so voluntarily, and they may have to tap Social Security or pension benefits before they had anticipated. Regardless of their situation, it is unlikely any new retiree will want to reduce their standard of living by any great degree.
To calculate the required income needed from all retirement and nonretirement accounts, estimate their sources of fixed income, such as Social Security and pensions, and subtract estimated expenses. Be advised that most clients, regardless of income level, do not have a good grasp of their personal expenses.
Using a generally accepted safe withdrawal rate of 4 percent, you can find the additional asset amount required to meet the need. This number is frequently greater than most people expect, and many find they are not on track to have sufficient income in retirement. The safe withdrawal rate can be adjusted for the anticipated retirement term of the individual and the unique goals of the client.
It is critical that a client’s retirement expense estimate is realistic. This is especially true relative to the cost of health care and long-term care. The rule of thumb of replacing 70 percent to 80 percent of preretirement income may or may not apply. The reduction in expenses is somewhat based on the assumption of lower debt and job-related expenses. However, many seniors may carry a mortgage, and they will be challenged with escalating health care costs. This is separate from personal care costs, which vary greatly. Long-term care and hybrid insurance policies may help cover such expenses, but the cost of premiums would have to be included in the budget.
Financial advisers need to ask clients about their retirement readiness. It only takes a few minutes to assess their savings rate. Ask them if they are maximizing their employer’s matching contribution, are funding an IRA, and about fixed-income resources in retirement. Encouraging working clients to increase their annual savings rate to between 12 percent to 15 percent and to regularly monitor their investment allocations will help achieve early or long-term retirement objectives.
Retirement readiness is a crisis in our country that needs to be addressed by our profession, one client at a time. A small investment of time in each of your clients could make a big difference.
2 U.S. Bureau of Labor Statistics, www.bls.gov.
3 Jennifer E. Brown, Joelle Saad-Lessler, and Diane Oakley,
Retirement in America: Out of Reach for Working Americans?, National Institute on Retirement Security, September 2018.
4 Employee Benefits Research Institute.
5 Center for Retirement Research at Boston College, crr.bc.edu.
Jeffrey K. Herr, CPA, PFS, CFP, is a senior vice president at BB&T Retirement and Institutional Services in Allentown. He can be reached at email@example.com.