Retirement Readiness – Three Simple Steps
By Rob Wrubel, CFP®, AIF®
Investment News recently ran an article highlighting a survey undertaken by Putnam Investments and Brightwork Partners to better understand retirement readiness and the variables in place that lead some people to be able to retire with 100% of their working income and others to retire with 46% of their working income. The study does not analyze returns, specific funds or market cycles – it reinforces the message that money invested over time (most likely in a reasonably balanced portfolio) will earn money.
Retirement is one of the key factors we address in working with our individual clients. Each plan must include some version of paying for life expenses after the primary working years are over. As individuals, we have plenty of choices to make about retirement. What age do we wish to target? Will we continue to work after retiring from our primary career? Will there be other income sources to consider, like inheritances, trusts and passive income from ownership in stocks, bonds, real estate or privately held business interests? Do we expect to use capital or seek to transfer capital to the next generation?
There are many other factors to include in planning, like homes, education, insurances, caring for other family members, special needs issues and more. Retirement is the one issue we all need to face as there are not many opportunities to build and replace income once we reach a certain age. The person I am today will have to provide some degree of income for the person I will be in the future.
The Putnam/Brightwork survey included nearly 3,300 working Americans. It accounted for a wide range of variables including access to savings plans, investor and saver behavior and other investments including Social Security. The household income of the two groups reported above was the same. The ones replacing 100% of income and the ones replacing only 46% had the same mean household income of $93,000.
Imagine the gap between two representative families. One family currently earning $93,000 will not see any reduction in expected lifestyle in retirement. They will have enough assets and income resources to produce the same level of income they had during the working years. They will now have both the time and money to pursue life’s great interests – travel, family, charitable work or hobbies.
The other family will see a significant change in life. They will no longer have any discretionary income. Retirement will almost certainly include a part-time job. It may mean moving to a smaller house or apartment if the mortgage has not been paid off completely. This person or family will likely have enough for the basics of life– but will likely lack the time or money to enjoy much more.
The report findings show three significant steps that lead to some people having a greater likelihood of a comfortable retirement.
- A commitment to saving.
- Participation in a workplace savings plan.
- Saving more leads to better outcomes.
1. Saving is as much about attitude as it is about action. Most people can find some way to increase their savings rate – whether it is from zero to four percent or from four percent to six percent. These ways to find savings usually mean some lifestyle change: Giving up on a no-foam extra whip extra shot latte once or twice a week in favor of coffee at home. Reducing the number of times eating out each week. Cutting the cable bill by 25% or so. Saving up to buy a car rather than pay high interest charges or lease rates. In 2007, the average American car loan was $479, according to Edmunds.com. Saving even half of this money means a savings of $2,874. This is over 3% of income for that family earning $92,000 per year in the study. That plus a match means a savings rate of 6% – enough to put that family in place to replace close to 84% of their income during retirement.
There are plenty of ways people can look to save over time. It starts with the desire to make a difference in your financial life and starting today.
2. Many people have the desire to save. Somehow, they just do not seem to do it. The study indicates that access to a savings plan at work is the single-best predictor of retirement readiness. I see this all the time. We discuss plans to save with a family. The ones who actually save seem to be the ones with a plan at work. Why? We tend to spend what we see. This seems to be true for all levels of income earners. The checking account balance rules our ability to spend.
The best part of plans at work is that we pay our retirement plans before paying ourselves. We force ourselves to save – and adapt the rest of our spending to the amount that hits the checking account later. We never really see the money – we just look at it on a statement a few times a year.
One of the bigger adjustments people need to make in retirement is to not see the entire balance of the investment and retirement account as money that can be used at once. A spending plan must be adopted to understand how much can be used each year and still have money around for a long time.
Employees should sign up to enroll at the first possible time for the retirement plan. It is easier to keep saving over time than to have to start fresh. They should usually have their retirement withholding be a percentage of income rather than a dollar amount. This insures that the savings level rate increases as they receive bonuses and pay increases.
3 .The third most important part of the study shows that people who save more are better off over time. No shocking news here. What is shocking is that people who saved more than 10% of their working pay were on track to replace 124% of their work income. Imagine that, being in better financial shape while retired than when working and having the time to enjoy it.
There was one more piece to the study. Participants who worked with advisors on average achieved an 82% income replacement level. Those on their own were on track to average just 61% of their income.
We work with people from different generations – retirees, near-retirees, people that have sold businesses all the way to people starting their first jobs. The Putnam/Brightwork study shows in real figures what we see at Cascade Investment Group every day. Right now, we hear on the news of people stopping contributions to retirement plans. Market volatility does scare away investors. We believe the best investment you can make is to build a savings and investing plan and stay the course over time. The research supports it over and over again.
Rob Wrubel is a Senior Investment Consultant with Cascade Investment Group, member FINRA & SIPC. Cascade Investment Group is not a tax or legal advisor. You should always consult with your tax advisor or attorney before taking any actions that may have tax consequences.