The “magic number” to retire comfortably – as worry-free as possible – has always been a hot topic between financial professionals and their clients. Do I have enough to do what I want? Did I save enough for retirement? Have I been living beyond my means? Do I have to keep working for another few years? Will I live to 100? These questions echo in almost everyone’s head, especially late at night. And, for some, they can get louder closer to retirement – when that “magic number” really matters. Luckily, there are many magic numbers.
One Magic Number Does Not Fit All
Take a look at your income before and imagine it after the gold watch. An income replacement number for retirement is often initially based on the income you have prior to your retirement. However, that figure may not apply to the actual income you need after you retire.
What’s your lifestyle now? What will it look like in post-retirement? Traveling around the world? Downsizing and becoming fulltime grandparents? Start a Second Act career? Supporting your kids if they move home? Living large and blowing it on a Porsche? Well, not everyone has retirement plans. So it doesn’t make sense that a “magic number” for one individual, couple or family is universal.
Note: This is the fourth part of a month-long series on financial awareness in the U.S., and how investors are planning – or not preparing – for retirement. Here are some important takeaways that are keeping Americans from financial security and peace of mind.
For the first time in a long while, Americans are feeling more stressed than ever. If surveys are any indicator, money concerns are a big part of it. In fact, more Americans are losing sleep over money issues than before the Great Recession.
According to CreditCards.com, 65% of Americans report having insomnia over money issues – a 9-point jump from 56% in 2007. And what accounts for these new, high levels of stress? Here’s a quick look at the sleep killers for Americans in 2017.
Note: This is the third part of a month-long series on financial awareness in the U.S., 401(k) plans, and how investors are planning – or not preparing – for retirement. If you have an employer-sponsored retirement plan, here are some strong insights into how high 401(k) plan fees can be detrimental for retirement saving goals.
As prior posts have mentioned, the 401(k) is the retirement savings plan most used by U.S. employers. And millions of Americans use it for their retirement saving goals. It’s no surprise as to why.
For one, the IRS permits pre-tax employee contributions of up to $18,000 (2017 contribution limit). Plan participants aged 50 and up are able to make pre-tax, “catch-up” contributions of an additional $6,000. Many 401(k)s also come with an employer match, providing a powerful savings incentive for U.S. workers.
Yet while the 401(k) is a valuable retirement savings vehicle, it has its downsides. One negative is the presence of high cumulative fees within some 401(k) plans and their in-plan investment classes. Over time, costly high fees can dwindle away earnings, which also siphons off money that would grow with compounding. So there is also the opportunity cost of the money investors could have earned if those funds remained within their 401(k). It could be a difference of thousands, if not tens of thousands of lost dollars in potential retirement income.
Note: This is the second part of a month-long series on financial awareness in the U.S., 401(k) plans, and how investors are planning – or not preparing – for retirement. If you have an employer-sponsored retirement plan, read on for insights on how a lack of financial education can tie into people’s experiences with their 401(k) plans.
Financial Literacy: A Must for Retirement Success
Financial wellness is the ground-spring for a happy and financially secure retirement. As common sense may indicate, this begins with well-informed retirement planning decisions. But many Americans fall short in their knowledge of even the basics, as numerous consumer surveys document, year after year. And in turn, this knowledge gap can lead into broken retirement dreams: crushing debt, depletion of savings, scaled-back lifestyles, and other headaches that undermine Americans’ post-work standard of living.
When it comes to retirement saving plans, Americans can have a variety of options. For millions, employer-sponsored plans are a primary savings vehicle – especially 401(k) plans. It’s no surprise as to why. A 401(k) plan offers a number of benefits, including tax-deferred accumulation, a high contribution limit for pre-tax savings, and in many cases an employer match.
As retirement nears for many Americans, it brings up an important question: How will their 401(k) plan prepare them to enjoy a comfortable, meaningful post-work lifestyle? Even with these benefits, many Americans are dissatisfied with their 401(k) because they perceive shortfalls in other areas. Limited investment options, low access to personal financial advice, and lack of money control are just a few investor frustrations.
There’s also the issue of subpar financial knowledge. Surveys indicate many people don’t understand 401(k)s, even though these plans dominate the workplace savings landscape. According to the Investment Company Institute, as of December 31, 2016 Americans held $7 trillion in all employer-based defined-contribution plans. Of this, $4 trillion was in 401(k) plans – or 57.1% of total defined-contribution plan assets.
After years of waffling on a more aggressive interest rate agenda, the Federal Reserve is indicating change may be ahead. Earlier this month, a new employment report showed the U.S. added 235,000 jobs in February. With job growth, wage growth, and other indicators on the rise, the Fed decided to raise the federal funds rate – or the rate for overnight loans – to a target range of 0.75-1.0%. In turn, it will affect interest rates nationwide – from credit card rates and lending rates to mortgage interest rates and more.
This hike comes after a three-month impasse – the last time the Fed increased its benchmark rate was in December 2016. As a New York Times article noted, this is the Fed’s third rate hike since the financial crisis of 2008-2009.
Now, how can this affect retired and near-retired investors - and does it mean future interest rate hikes?
The stock market has been surging to new highs. For the first time ever, the Dow Jones exceeded 20,000 in January. Then on the heels of President Trump’s first address to Congress, it charged ahead yet again. The Dow posted a 300-point jump, closing at over 21,000 on Wednesday, March 1. These gains come at a time when market volatility has also been on the decline. In early February the CBOE Volatility Index – more commonly known as the “investor fear index” – showed investor concerns on the decline.
However, even as the market goes up many people still worry about their investments. What will the market do next? Do they own too many stocks? When the market goes down, will it be just be a spill, a correction, or a crash? For that matter, do they have too much money in other risky, market-based investments?
For people close to retirement, this brings up an important question. Should you stay with your current portfolio allocation mix, or is it time to move into a safer strategy?
Good news: People are living longer. But it does come with downsides. For one, increasing lifespans bring greater financial risk, like outliving your retirement money or forking over income for costly health expenditures. Then there is the evolving question of what a longer retirement looks like.
Just some decades ago, many Americans shared a common vision. You worked for the same company for years, often in exchange for a defined-benefit pension. Then you left your job and shifted into a post-work lifestyle, drawing on your pension and living comfortably.
However, times have changed. As evolving trends and statistical projections indicate, retirement could last as long as 20-30 years, or perhaps even 40 years! Now it’s hard to define what retirement should be. That brings yet another challenge: How can we prepare financially for an extended post-work lifespan?
If you wonder about what you can do, here are some quick tips you can put into action. Before we go into those, let’s address an important topic affecting the near future: the pace at which longevity has changed over time.
It’s been said that the 70s are the new 50s. But if a new research study is any indicator, U.S. life expectancy may be set to grow even more. With current American life expectancy sitting at 78.8 years, researchers at Imperial College and the World Health Organization project that longer lifespans could be in store.
According to the researchers’ findings, U.S. life expectancy would lengthen to 83.3 years for women and to 79.5 years for men. The predictions jar against data published in December 2016 in a longevity report from the Center for Disease Control, which found U.S. life expectancy dropped in 2015 – the first time in 20 years.
Now, why does this matter? Longevity risk, or the possibility of running out of money in retirement. As life expectancy rises, the amount of post-work years for which you will need money may increase. According to the Social Security Administration, 25% of 65-year-old Americans today will live past age 90, and 10% of 65-year-old Americans will exceed 95 years of age. So, it’s important than ever to plan for old age in your financial future.
Chances are you know the concept of asset allocation. As Forbes contributor Mitch Tuchman puts it, asset allocation is the “collection of investments you own,” depending on your risk tolerance and your desire for potential investment returns. In the investing world, it is a strategy of apportioning assets to achieve a strategic balance of potential risks and returns that is right for an individual investor.
What Does That Have to Do with Retirement Planning?
That’s all good and fun, you may say – but what does that have to do with retirement planning?
Well, from a planning standpoint, plenty. It is the same question of deciding how to allocate a retirement portfolio.
But in this case, decisions revolve around striking a balance between managing potential risks and achieving desired retirement outcomes, like income certainty, wealth protection, or other goals. In financial lexicon, this strategy is known as “diversification.” When it comes to retirement planning, diversification is arguably an essential part of a successful retirement strategy. But why?