Updated 8 months ago
Traditional retirement — leaving work at 65 to boat or play golf — is quickly becoming a thing of the past, as people live longer and want different things from their retirement years.
With pensions fading into memory, and Congress considering cuts to Social Security and Medicare, many Americans expect their 401(k)s to guarantee financial security. But most people underestimate what it costs to retire. Worse, Americans are withdrawing billions from 401(k)s or similar retirement savings plans for non-retirement spending.
Combine those dynamics with low interest rates, and some retirees or soon-to-be retirees are finding themselves with too little to achieve the retirement lifestyle they had planned.
Here is what some Florida wealth managers are advising.
Sheri Billings says retirees are outspending their savings because of the current low interest rates, extended life expectancy and incorrect assumptions about rates of return. Many pension funds have the same problem, she says. “It’s the sequence of returns, not the average rates of return, that get one in trouble.”
Billings believes proper planning requires a reality check: “What are my goals in retirement? What am I actively doing today to get there? Am I saving enough today to allow me to support my lifestyle in retirement?”
Billings believes retirees often overlook costs such as health insurance and long-term care and the rate at which they will need to draw down their assets. She recommends that retirees assume they’ll withdraw 4% of their nest eggs each year. Other considerations should include how much they want to leave to heirs.
Billings looks at the value of a client’s portfolio, the various possibilities for growth and the individual’s tolerance for risk at various ages. Then she estimates how much the client will need in retirement and sources of income. Most important, she tries to identify and address potential gaps before retirement and ensure that clients understands the action needed to make up the difference. “You don’t want to be in the middle of retirement and be forced to adjust your lifestyle,” she says.
Coaching clients on how to build wealth for retirement has become more challenging because most people now lack confidence in their assets, Billings says. “Many Baby Boomers have lived through disappointments in stocks and real estate, and I fear the next disappointment will be in bonds.”
She sees investors reaching for yield by extending maturities on bonds or sacrificing credit quality. “They, frankly, do not understand the risk they are taking,” she says. She recommends clients strike a balance between stocks and bonds to better ensure a comfortable retirement.
Next page: Frank Armstrong, President, Founder of Investor Solutions, Miami
There are a few critical steps in assessing clients’ abilities to adequately fund their retirements, says Frank Armstrong. The first is an inventory of assets. The second is an evaluation of living expenses based on the lifestyle the retirees want to maintain.
“Some people may want 60% of their current income, and that may not be reasonable,” he says. “Some don’t want to get by with less and will happily continue to work to support their lifestyle.”
Once Armstrong helps clients determine living costs at today’s dollar, he inflates that by 4% and then determines the number of years it will take them to get to their target for retirement. “Of course, the wild card is health insurance and long-term care,” he says. Those who retire before 65 will have a gap before Medicare kicks in, and even then, he says, they may want to consider a health insurance supplement, which needs to be factored into living costs. They may also want to buy a long-term care policy. “If you don’t have the capital or insurance to withstand a few years in a long-term care facility, it can be devastating,” he says.
Armstrong advocates a glide-slope approach to saving: Early in your career, a portfolio should be heavily weighted toward global equities. Later, scale back on equities. “You want to make sure the day you retire is not dependent on what the market did yesterday,” he says. At about 55, Armstrong recommends a shift toward more fixed income, short-term diversified quality bonds. “You’re not looking for the highest yield possible but rather rock solid returns.” If you’re concerned about being underfunded, he says, you could delay shifting from equities for a few years. The ideal retirement portfolio, he believes, is 60% stocks and 40% bonds.
Armstrong suggests waiting until 70 to tap Social Security, when the payout is highest. “There are few places to put your money that you are guaranteed 8%, plus cost of living,” he says. If delaying is not an option, “taking it sooner may not be the worst thing in the world,” he says.
-- Bob Doyle, President, CIO, Doyle Wealth Management
-- Christina Doss, Managing Director for Private Wealth Management, North Florida SunTrust Private Wealth Management, Jacksonville
Most often, says Bob Doyle, clients need to invest in something that pays today and grows over time, which leads them to common stocks. “We buy blue-chip stocks that pay a moderate dividend,” he says. He looks for stocks that pay a 2.5% to 3% dividend and have a dividend growth rate of 6% a year or greater.
While 90% of a portfolio can be dividend growth stocks, the rest is in what Doyle calls a bridge portfolio — two to four years of short-term investments such as short-term fixed income.
Doyle recommends investors create a financial plan while they are in their mid-30s. Detailed planning needs to be done at least 10 years from the day a person plans to retire. That 10-year period allows for increasing 401(k) contributions, paying down debts, funding a Roth IRA each year and cutting spending. Waiting to do so until only a year or two out from a target date often means postponing retirement, Doyle says.
To come up with a customized plan for clients, Christina Doss brings in a financial planner, financial adviser and portfolio manager. “We want to make sure we’re focused on long-term needs rather than reactive to short-term swings,” she says.
She recommends stocks for a client in prime income years. For someone in retirement or nearing retirement, she recommends more fixed income but also suggests keeping a portion of funds invested in dividend-paying stocks, which offer opportunity for growth and income.
Fixed-income allocations include more than treasuries. They include investment-grade corporate bonds, international bonds and mortgage- and asset-backed securities and possibly some commodities. The downside of weighting heavily toward fixed income, she says, is the possibility of being underfunded for retirement.
Often, clients want to jump right into an investing strategy. Doss encourages them to instead start with a more comprehensive financial plan. “Without that plan, they are making investing decisions in a vacuum.” This year, taxes and health care costs are going up.
“Having the benefit of a financial plan can help determine if someone must save more or will need to take more risks to meet long-term retirement needs.”
Those with the best chance of adequate retirement income create a financial plan in their 30s, she says. But even those in their 50s or 60s can meet their goals if they trade off-the-shelf solutions for a customized strategy, she says. “It takes a lot of homework and collaborative dialogue.”
-- Monte Kane, Managing Director Kane & Co.
The key to retiring the way you want, Monte Kane says, is factoring setbacks into your calculations. “What would happen if a business didn’t make it or if you had job loss or your health declines or the loss of one income earner? And what is in place to insure for those events? Lack of planning can lead to some not so golden years.”
Kane recommends creating a spending plan as early as possible. “If you get close to retirement and discover you don’t have enough to live on, you are going to need to make major adjustments. The sooner you do that the better.”
Often, he has found middle-aged adults with grown children are confronted with whether to give them financial support. “My advice is, ‘This is your time; you can’t afford to risk your retirement savings.’ ”
Kane has been surprised by the number of people who unexpectedly have to scale back in retirement. “I see people who are four or five years into retirement and they go into a rental because they couldn’t afford to keep up their homes.” Kane says savings rates still aren’t what they should be. “Regardless of age, you need to know what resources will provide for your retirement. It’s never too late to re-evaluate,” he says.