Planning for retirement is a necessary, if potentially intimidating, part of being financially savvy. Retirement preparedness varies widely among people, depending on their age, education level, and gender. Still, some recent research indicates that the status of aging Americans isn't as dire as previously thought. An interesting piece from the RAND Corporation looked at retirement readiness by taking into account expected consumption patterns rather than strictly considering income replacement and found that 71 percent of Americans aged 66 to 69 are prepared. The study did note a high disparity in preparation between married and single individuals and a distinction according to educational level.1
How much is enough?
Experts like to discuss percentages of income that people should save during their working years; indeed, saving more is a good idea. For example, Fidelity Investments typically suggests that most people should be diverting fifteen percent of their pre-tax income during working years to their retirement fund to accumulate enough to sustain them through a thirty-year retirement.
Others prefer to flip the equation around and encourage future retirees to estimate how much money they will need monthly to live comfortably and then work backward to determine how much to save. For example, if you need an income of $10,000 per month, a savings of $2 million should fund that. But if you can save $2 million, chances are you will have some guaranteed income from Social Security and possibly a defined benefit pension. In that case, you won’t need to draw as much from your retirement savings to reach that $10,000 level.
Performance variability matters.
Saving two million dollars is no guarantee that you will have enough money to live comfortably through retirement. Your portfolio’s performance, especially in the beginning, can significantly affect your balance. For example, suppose a retiree follows the popular 4 percent rule when making early withdrawals from their retirement account, and simultaneously the portfolio is losing value. In that case, they may have substantially less money in a few years than anticipated. That’s one good reason that retirees should have expert advice both leading up to and during retirement to make early adjustments.
Your retirement planner can evaluate your portfolio.
While some investors can and do manage their own retirement portfolio, many prefer to have the guidance of a professional. A financial/investment adviser (perhaps a Certified Financial Planner focusing on retirement planning) can help you analyze your holdings and decide whether and when to make changes.
In addition, a professional can help you determine whether you have enough saved and how much risk you currently have and should have going forward. Investors may also benefit from a review of their holdings to help ensure that they haven’t overlooked components that can manage exposure–like including real estate and real estate-backed securities.
A financial/investment advisor can review all your holdings, including real estate, securities, fixed income, and other sources of income, and measure that against what you expect to need for a comfortable, less-stressful life in retirement.
1Rand Corporation. “More Americans May Be Adequately Prepared for Retirement Than Previously Thought.” www.rand.org 2012
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
Neither Asset Allocation nor diversification guarantee a profit or protect against a loss in a declining market. They are methods used to help manage investment risk.
