Retirees’ Sense of Well Being – Under Assault
By: Peter McClellan
When people retire, they want to enjoy themselves; perhaps take up some activities that they could never quite get around to during their working years, take an extended trip, do volunteer work, or spend more time with family and friends. Regardless of what you want to spend your time doing, worrying about running out of money should not be included. Yet, it seems today that as so many people move into their retired years, an unanticipated fear seems to creep into their minds and can rob them of a sense of financial stability.
A Brief Look Back
It wasn’t always this way. Government statistics tell us that the percentage of workers covered by a defined benefit retirement plan (the traditional monthly pension check in the mail box) has been steadily declining over the past 25 years. Today, it is estimated that less than 7% of retirement plans provide that type of consistent monthly income. The 401(k) plan has replaced pensions. Yes, there is more freedom for an employee to invest as they please. The problem however is that most employees are not pension consultants or actuaries that have a reasonably sound working knowledge of what they need to save over the course of their working years and how they should allocate those investments so as to produce income that needs to last, in many cases, for decades to come.
What’s gone wrong?
If a retiree is relying upon generating consistent monthly income from a traditional balanced portfolio (60% stock funds and 40% bond funds) it seems that inevitably, there will be good times, bad times and for some, constant fear of bad times even during good times. Angst sets in as values fluctuate, not only because of the investment performance but also the constant monthly withdrawals. If you are like most people these days, you won’t likely have the pension your parents enjoyed and you will indeed depend more heavily upon assets that you saved for retirement to support your later years of life. That reliance may wind up working against your sense of well-being.
FOR STARTERS, YOU MAY NOT HAVE SAVED ENOUGH:
The average 401(k) balance, according to a report dated January 6, 2016 suggests that while there is now over $5 trillion in assets, the average 401(k) plan balance reached a new high of $91,300 in 2014 – up more than 30% from $69,100 in 2011.
The Motley Fool author Brian Stoffel suggested that the simple average 401(k) balance is $102,682 And if you apply the 4% rule for withdrawal to that number, that’s messed up. Nobody lives on $4,107 a year unless they live in severe poverty. Now of course, people who are just starting their careers are included in that scary average so one would think that people who are closer to retirement would have more saved and by and large, many do. But, is it enough?
CURRENT STATS: Ahhh…. NOT SO GOOD
According to EBRI (Employee Research Benefit Institute) March 2016 Retirement Confidence Survey’s Fast Facts, the percentages of working employees 55 or older have the following amounts in total savings:
- 54% have less than $99,000 saved;
- 15% have between $100,000 and $249,000; and
- 30% have more than $250,000 saved. (It didn’t break the numbers down any further.)
Even if we assume that those in that last 30% category can live off about 4% of $250,000 annually (and that is a huge assumption), what happens to the 70% of those that have less than $250,000 saved? Or, what about the 54% that have less than $99,000 saved heading into their retirement? If these numbers are even remotely accurate, we are then, in fact, a culture on the edge of disaster or at a minimum, some big problems for the elderly.
PEW Research.org estimates that today in this country, 10,000 people reach 65 every day. That’s 3,650,000 annually! One can only hope that the majority of these people have significant financial stability. But, just look at the number of people in their 70’s who are working at places like McDonalds or greeting people at Walmart. It’s frightening. Most of those workers are not there because they really want to be there.
SO, WHAT ABOUT THE ONES WHO HAVE SAVED SIGNIFICANT AMOUNTS:
There are a lot of life lessons one can derive from having lived through the past 16 years (January 2000 through December 2015) since the new millennium started. Twice, the stock market gave up 50% of its value. The S&P 500 stock market index produced an annualized average return of 4.06% according, to Thompson’s Investment View over that time frame. What happened to the glory days of the 1980’s and 1990’s when it seemed as though stock market values would double in five to seven years? Well that hasn’t happened. As of December 31, 2015, the S&P 500 had not yet doubled in value from where it started in January of 2000. It did come close, but even if it did double, the fact that it took 16 years tells us that we are no longer living in the type of stock market we had grown accustomed to.
As we entered this new millennium in 2000, many people who were entering retirement were of the mindset that things would continue as they had for the previous decades. At that time, the rule of thumb for what was considered to be a “reasonable” withdrawal percentage was 5% and that seemed too conservative. Yet, a $1,000,000 invested on December 31, 1999 through December 31, 2015 in the S&P 500 index with a 5% or $50,000 annual withdrawal, only had a remaining balance of approximately $330,000; assuming that $50,000 was drawn each year. Yes, that investor would have taken out $800,000 over that time frame, but as you can imagine, barring some type of grand slam (i.e. lottery winnings) it’s simply not likely that this retiree whose first year of retirement was 2000 will not run out of money. In this scenario, they are on their way to going broke. There are a lot of people who retired sometime in the late 90’s or early years of the 2000’s who never had pensions and have been drawing down their account balances.
LET’S HOPE THE STUDIES ABOUT THE AVERAGE INVESTORS’ BEHAVIOR ARE WRONG
If the market hasn’t been of enough concern, Dalbar (a research firm dedicated to the study of investor behavior) continually cite the enormous disparity between the 20 year average returns of the stock market and how well investors actually did by comparison. Dalbar suggests that investors still love to pile into investments that have had attractive recent runs, after they gone up dramatically, only to bail out some time afterwards when the fund begins to decline as markets correct. This would be the opposite of buying low and selling high and it is the way that even those who have set aside significant amounts of money over the years tend to harm themselves by mixing short-term emotion with long-term investments. Not a good idea.
It’s beyond the scope of this article to offer any specific strategies to help cope with the angst that the past 16 years has fostered in the lives of so many retirees who had sadly already suffered the misfortune of choosing to retire at less than optimal time. While we can’t control what the investment environment might be as we retire, there are a number of things within our control that might help mitigate worry in retirement years:
- Are you consistently saving as much as possible? Many people won’t max out their 401(k)s until their done helping to launch their kids, but many get too comfortable with new found cash flow when the child rearing years are over. Is time for you to significantly up that percentage at work to the point that you aren’t allowed to put any more in it? (That’s what we meant by “maxing” it out).
- Are you one of those in the small minority of folks who will actually receive a pension? If so, do you understand how much it would be at 65 or 66 and what the spousal survivor benefit will be if you are married?
- Have you run a projected retirement plan with some reasonable assumptions? If not, we can give you something to shoot for that can cause you to look for ways to save more. Maybe work longer, if need be, or modify goals downward a bit.
- Do you have grasp on Social Security benefits? Many people don’t give sufficient thought to how or when they take their benefit often times baking in permanent reductions in monthly income for the rest of their days. With life expectancy on the rise, that can be a huge mistake.
- Are you prone to buying high and selling low? No one likes to admit that’s how they have responded to the market’s ups and downs but there are ways to minimize downside risk. Have you explored ways of taking some risk off of the table?
In summary, the more a retiree relies on their portfolio to support their retirement income, the greater the tendency for a higher degree of angst in the retiree’s mind. If you are like most people these days, you won’t likely have the pension your parents enjoyed and you will indeed depend more heavily upon assets that you saved for retirement to support your later years of life. That reliance may wind up working against your sense of well-being. Are you confident about that you have sufficiently addressed each of the five items listed above that you do have some control over?
At the 401K Latte Company, we take retirement income seriously. Proper income planning can reduce the stress and worry that plagues far too many retirees. Is your sense of well-being under assault? While we certainly aren’t psychologists, we are committed to helping people create greater and greater financial stability. Sometimes a second opinion from a fresh set of eyes looking at your financial picture can be a help. Come on in and Invest in a Conversation soon.
The Disappearing Defined Benefit Pension. Social Security Office of Retirement and Disability Policy. Vol.69.No. 3, 2009
The Average American Has Saved This Much in a 401k – How do you Compare? The Motely Fool. Brian Stoffel. Nov.2, 2015
Employee Research Benefit Institute – Retirement Confidence Survey’s Fast Facts. ebri.org Fast Facts. March 2016
Dalbar: Why Investors Suck And Tips For Advisors. April 8, 2015.