Americans are facing a retirement crisis. And they know it. The story is not a new one, but as larger numbers of the baby-boom generation approach retirement age the extent of the problem is becoming more clear. The 2014 Employee Benefit Research Institute’s Retirement Confidence Survey reports that a mere 13% of workers feel very confident that they have enough money saved for a comfortable retirement. What’s more, these respondents came almost exclusively from higher income households- defined as having an annual income of $75,000 or more. Moving further down the income scale, the results are far worse- 36% of survey respondents with earning under $35,000 per year reported having less than $1,000 saved. Social Security, which makes up the sole source of income for approximately 1 in 5 retirees, and more than 50% of income for 2 in 3 retirees, will become an increasingly important component in the retirement plan of many Americans.
While the results paint a grim picture, there may be steps that those approaching retirement can take to help put their plan back on track. Saving more, living on less, working longer, or working part-time in retirement can all have a positive impact, but which strategy is optimal, or possible, is often less clear.
Not surprisingly, low income workers with little savings have fewer options. Still, they may make the best of a bad situation by working longer (part or full-time) and deferring their Social Security benefits for as long as possible (age 70). Married couples may have the option of using a “file-and-suspend” strategy so that one spouse is eligible to claim Social Security spousal benefits based on the earnings record of the other spouse. This can help increase the family’s income during the period of time that worker’s benefits are deferred. By deferring Social Security worker’s benefits, lower income individuals will help ensure that they are receiving the maximum level of income replacement and, for married couples, the highest Social Security survivor’s benefit.
As critical as Social Security benefits are for the retirement readiness of this cohort, many lower income workers begin collecting benefits as early as possible out of fear that they will die young, or the program will not have adequate funding to pay benefits. Life expectancy is never certain, but it’s instructive to note that the average life expectancy at age 65 for men is age 84, and age 86 for women. Additionally, almost 28% of adults still living at age 65 will live to age 90. Regardless of individual health issues, married couples should measure life expectancy over the lives of both spouses.
Social Security does face a funding shortfall, however the 2013 Social Security Trustees Report estimates that the program has sufficient resources to pay 100% of benefits until about 2033, and approximately 75% of benefits thereafter. While the program’s funding and benefits are likely to change, the heavy reliance on the program by many retirees suggests these changes are likely to be phased in over time. This is consistent with previous changes made to the program, notably increases in Social Security full retirement age.
More affluent workers may have several options for addressing a shortfall in retirement savings, but are often uncertain which strategy will produce the best result. Determining the best option(s) is dependent on several variables- current age, income, expected retirement age, current savings and anticipated future savings being just a few. To illustrate whether saving more, living on less or working longer is likely to produce the best outcome, we crunched the numbers using a retirement calculator available on our website- Retirement Planner with Retirement Earnings
Meet Our Client:
Cliff is 60 years of age, with an annual income of $100,000, retirement savings of $500,000 and is expecting to retire at age 66. He is currently saving 10% of his annual salary for retirement and expects to require annual retirement income of 75% of his final year’s salary, adjusted for inflation. This income will need to last until his death at age 90. We further assume he will begin collecting Social Security benefits at age 66 and will earn a 5% average annual return on his investments during retirement. Under this scenario, Cliff’s portfolio will last until he reaches age 82. Now let’s see how Cliff fares if he makes adjustments to his current plan.
- Increased saving– if Cliff increases his retirement savings from 10% of income to 20% for the next six years, his portfolio is expected to last until age 84. That’s certainly an improvement, but leaves him far short of his goal.
- Reducing expenses– if Cliff instead decides to decrease his retirement living expenses from 75% of his final year’s income to 70%, his portfolio is projected to last until age 85. That is a somewhat better result.
- Part-time work– in this scenario, Cliff retires from full-time work at age 66 but continues to work part-time for an additional four years, earning $2,000 per month. The results are similar to a reduction in living expenses, with the portfolio being depleted at age 85.
- Deferred retirement– finally, we have Cliff continue to work on a full-time basis until he is age 68. He begins Social Security benefits at age 68, instead of age 66, but makes no other changes to his plan. This scenario yields the best result, with Cliff’s portfolio being expected to last until age 89.
The best solution for Cliff will ultimately come from a combination of strategies. It is, however, instructive to view each option in isolation and then identify the best solution(s) based on the choices that the client has available to them. Cliff may have additional options, such as purchasing a deferred income annuity to augment his income later in life, or using the equity in his home to provide additional retirement income.
Clearly, identifying whether you are on track for retirement is best done far in advance, when there are more remedies available. At age 60, deferring retirement may yield the best outcome, but may not be an available option. Older workers should be diligent about keeping their job skills and professional networks up to date, but should also be mindful to keep up with cultural developments that help aid in their interactions with younger colleagues.
Retirement planning is an important and ongoing process. It requires a thoughtful tradeoff between current and future consumption in combination with measurable goals. Good advisors can help you identify the options and develop a plan. Those that find themselves short of their goal may be faced with difficult choices, but they are rarely faced with no choice. The conversations and solutions may prove to be difficult, but are far less painful than a retirement spent in penury.
John Male, CFP®
The Gassman Financial Group
G&G Planning Concepts, Inc.
The Retirement Maven ™
9 East 40th Street, Suite 1500
New York, NY 10016
Tel: 212-221-7067 Ext. 17