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Why Is Funding Retirement More Necessary Than You Think?

Did you know that most people do not truly have enough money for retirement? According to research, those who are saving for retirement will need to significantly increase the percent they save if they want to fund their desired standard of living in retirement.

Americans presently only save on average 6.8% of their salaries for retirement plans which are far below what is required to fund in today’s market, according to the retirement researchers, Wade Pfau, a professor at The American College of Financial Services,

Michael Finke, chief academic officer and Dean at The American College of Financial Services, and David Blanchett, at Morningstar Investment Management.

Their research concluded that a normal  35-year-old couple with an average household income of $50,000  needs to save (pre-tax) about 11.1% to 13.1%  of their income to maintain their standard of living in their retirement phase. At the same time, the same couple with $100,000 of income would need to save 13.4% to 16.8% to maintain their standard of living.

What factors are to blame? Let’s have a look:.

Low future investment returns

The researchers wrote in their report that expected low returns on assets affected the cost of funding financial goals. According to their example given in the report Required Retirement Savings Rates Today,  “Assume a household earns $50,000. At age 25, there is a 3% annual growth rate in income if the individuals want $1 million in purchasing power after the age of 65. If they expect a 5% real return on investments, they will save 10% of their income each year. If they expect 2%, they will need to save 18% of their income each year to reach their $1 million goal.”

Low retirement income

It has also been noted that a persistent low return on assets not only increases the percentage of household income one needs to save for his or her retirement but it also negatively affects the income one can expect to receive once that financial goal is reached.

Finke, a co-author of the report, said: “For savers, lower returns mean less spending across the life cycle. They spend less during their working years because they need to save more. During retirement, their goal should be to spend about the same as they did during their working years. Even though they’ll be spending less, they need an even higher nest egg when investment returns are low. There’s really nothing good about low returns if you’re a saver. If you’re a borrower, it’s great news.”

Retirees of this generation are more expensive

The researchers wrote, “Today’s workers who expect to retire at the same age as retirees in previous generations will face an even greater cost of funding retirement because of increases in longevity after the age of 65. Retirement is significantly more expensive in a low-return environment, but it is even more expensive if a person lives longer.”

In fact, for a person retiring today, the price of a dollar of safe income is nearly 100% higher than it was in the year 2000 because of the declines in real bond interest rates and increases in longevity.

“Not only are investors getting less return on their safe bond investments,” notes Finke. “They’re also living longer, so they need to fund more years of spending. The bottom line is that retirement is just more expensive today than it was in the past.”

Save more to meet your legacy goals

“For those who want to leave $500,000 to their heirs, they’ll simply need to save more,” says Finke. “Low rates also increase the cost of buying a life insurance policy to fund a legacy.”

So, what do retirement savers need to do in this low-return world?

  • You need to use low rates of return when computing how much they need to save for and draw down in retirement.
  • Try to increase the amount you’re currently saving for your retirement (means lower your current spending) to fund your desired living standard in retirement.
  • Instead of using bond ladder consider using an income annuity for your safe assets. This is because the researchers suggest that annuitization is more attractive and acceptable option when interest rates are low. The researchers wrote in their report that “This is because the increase in the cost of building a bond ladder is greater than the increase in the cost of buying an income annuity in a low-rate environment. With a bond ladder, retirees spend principal and interest. With an income annuity, retirees spend principal, interest, and mortality credits, which are the subsidies from the short-lived to the long-lived. With interest low in both situations, the mortality credits become more important.”
  • There is a difference between savings of high earners and low earners,  so high earners need to save more money to fund their desired standard of living in the retirement stage. For example, an unmarried 45-year-old man earning $50,000 would need to save at least 19.4% in this low-return world while that same person earning $100,000 would have to save at least 25.6% to fund the desired lifestyle in retirement.
  •   Retiring later, for instance at the age of 70, lowers the percent a person need to save. Or we can say that a single 35-year-old person with an average household income of $50,000 needs to save 19.1% per year if he wants to retire at 60 age, to fund the desired lifestyle in retirement, and if he wants to retire at 65, he needs to save 15.8%.

At United Counselors our expert advisors can guide you various ways of increasing your retirement savings. Should you have any questions about your retirement savings, please visit us at


Source: USAtoday


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