Impediments to Success

When developing a strategy to address retirement income needs, some key knowledge gaps and misperceptions can steer investors off the path to success. Correcting damaging behaviors begins with identifying and learning more about them. Then, financial professionals and investors can work together to develop appropriate solutions. Some significant impediments to success include:

• Becoming Complacent
• Underestimating Income Needs
• Underestimating Longevity Risk
• Underestimating the Impact of Inflation on Spending Power
• Underestimating the Cost of Healthcare and Long-Term Care Needs
• Withdrawing Too Much from Your Nest Egg

Becoming Complacent
According to a survey conducted for New York Life in 2006, those surveyed feel they are relatively well-prepared for retirement, but this confidence may be due, in part, to lowered expectations for the “golden years”. Only 11% of pre-retirees surveyed believe that their lifestyle will improve in retirement. By comparison, about a quarter (27%) of current retirees say that their standard of living is higher in retirement than it was during their working years.

Planning for a retirement that could last for 30 years or more is daunting. But before you downsize your retirement expectations, you should first make a realistic assessment of where you are, where you want to be, and what it will take to get there. You might be able to make up more ground than you currently think is possible.

Underestimating Income Needs
To accumulate sufficient assets for retirement, it’s important to first assess how much income you will need to fund your nonworking years. Almost nine in 10 (86%) pre-retirees surveyed are confident about their ability to accurately estimate their annual retirement income need. But 28% say they don’t know how much they need to save for retirement.

The perspective of current retirees highlights the importance of understanding and anticipating retirement income needs. About a third (34%) of retirees say they are spending more money in retirement than they had expected. Two in five (43%) regret not thinking more about their income needs before retiring.

Experts project that you’ll need up to 80% of your pre-retirement income annually to maintain your lifestyle in retirement.

Underestimating Longevity Risk
Longevity risk is the risk that you will outlive your assets. To be prepared for your retirement, it’s critical to understand how long it might last. Americans today must plan for the very real possibility that their retirement funds may need to last for 25 or 30 years, perhaps longer.

When developing a financial strategy for retirement, it may benefit you think beyond your life expectancy. Many new retirees make the mistake of simply anticipating their retirement income needs through average life expectancy. Life expectancy is not the latest year that you can expect to live. Rather, it’s a median, meaning that you actually have a 50% chance of living beyond your life expectancy.

Underestimating the Impact of Inflation on Spending Power
To accurately estimate how much retirement income you’ll need, it’s important to understand the impact inflation has on spending power over time.

More than half (53%) of the retirees surveyed felt they should have known more about how inflation affects spending power. One in five (21%) said they did not do a good job estimating the impact inflation would have on their retirement income.

A 3% inflation rate might not sound like much. But it can have a significant effect on your retirement nest egg. If inflation continues at its historic rate of about 3%, in 25 years your money will be worth less than half as much as it is now.

Withdrawing Too Much from Your Nest Egg
For a considerable majority of retirees (70%), managing money in retirement is as hard as – or harder than – saving for it. Only one in 10 survey respondents could name a realistic annual retirement savings withdrawal rate. Eighty-eight percent of those surveyed either didn’t know or underestimated the percentage of their retirement savings they could safely withdraw each year without running out of money during their lifetime.

The timing and amount of withdrawals must be evaluated carefully to mitigate the risk of outliving your assets. Experts generally agree on a safe inflation-adjusted withdrawal rate of 4% for the typical retiree. The less you receive from Social Security and pensions, the more conservative your withdrawal rate must be to ensure that your retirement savings can last 30 years or longer due to increased life expectancy.

To learn more about withdrawal rates, visit Key to Making Retirement Savings Last: The Withdrawal Rate

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