Many Americans in general fear outliving their income in retirement (25%), having to give up their current lifestyle (23%) and being swamped by health care expenses (19%). According to the survey, Baby Boomers especially have reason for concern: One in four have less than $5,000 saved for retirement, according to a survey from the Indexed Annuity Leadership Council (IALC).
Jim Poolman, executive director for the IALC, in Bismarck, North Dakota, says one could assume those 25% who fear outliving their savings are the more educated people who have actually done some retirement planning. He contends that those not planning are unconcerned because they have not yet come to realize how much they will need.
Poolman says understanding the necessity to plan is Step 1, along with determining how much income the person will need in retirement. “Starting to save is imperative,” he says. “Even for Baby Boomers, it is better to start now than put it off another day.” He adds that setting a budget can help this group with retirement planning.
Mark Browne, head of the North American channel, global institutional and retirement marketing, at BNY Mellon Investment Management in New York City, says how much a retiree requires to cover bills and unexpected expenses comes down to individual needs. “Part of a broader retirement plan is to start with the end goal and work backwards to do the necessary saving and investing. And ensure a good spending plan is in place.”
John Davis, director of retirement marketing and insights, also at BNY Mellon Investment Management in New York, says income replacement ratios can help savers in their early years, giving them an idea of how much to put away. However, as savers approach retirement, this measure is not a good predictor because each individual will have developed a specific set of needs based on the retirement he envisions. He suggests that this is the time for Boomers to be directed to a professional adviser, who can put a plan in place. He also notes that long-term care insurance should be considered and that employees with a traditional pension plan will need to save less in their defined contribution (DC) plans.
Poolman says, if Baby Boomers have a defined contribution plan, they should save enough there to get the entire company match or profit-sharing contribution to maximize retirement potential. Any gaps in retirement savings needed can be addressed with a fixed-income annuity. “They can combine a well-balanced retirement portfolio, using diversified assets in the plan, with a more conservative product outside of the plan,” he says.
An annuity can also help with health care costs, Poolman adds. “It’s interesting that our study shows only 19% of people are worried about health care expenses. They are not recognizing that people are living longer. Health care costs are going to go up because, as people age, they will have more health-related issues. An annuity can help because it can provide a steady stream of income to help pay for long-term care, and some have riders to withdraw for long-term care,” he says.
“One of the bigger points we try to show employees is the likelihood of living to certain ages,” Browne says. “For a married couple at age 65, there’s a 60% chance one will live to age 90 and a 30% chance one will live to age 95.” He says education plays an important role in planning for longevity.
According to Davis, a retiree should plan to live at least 25 years after work ends—conservatively, for at least 30 years. He agrees that deferred annuities are a way to address longevity risk because employees will know they will have some guaranteed income if they do live into their 80s or beyond.
Boomers also face market risk. Poolman points out that, during the recession of 2008/2009, many who were getting ready to retire lost a significant amount of their investment portfolios and had too little time to completely ride out the rebound. Many worked longer. “As you get closer to retirement, it’s so important to look at investments and ask, if the market dropped 25%, how would it impact your portfolio and could you still retire?” he says.
He advises those nearing retirement to perform an annual checkup of their investment portfolio. Doing so allows them to make adjustments. “As we get older, typically investment instruments used should become more conservative. We don’t have time to outlive market volatility.”
There may also be market downturns after a retiree begins taking withdrawals. Browne says Baby Boomers should not assume a steady market when planning for withdrawals. As individuals enter retirement, they should work with an adviser to create a broadly diversified portfolio, especially one that seeks to reduce risk in down years, he says. “The draw-down strategy should be dynamic and flexible. People should spend more liquid investments in the bottom years and give long-term investments time to recover,” he says.