For most retirees, figuring out how much money to withdraw from savings every year is a difficult-to-impossible math problem. But the issue goes much deeper: fears about what the future might bring make this decision overwhelming.
Extreme caution is a popular solution. A 2009 study estimated that by the time middle-income retirees are in their 80s, they still had not touched about three-fourths of their savings, and 2016 research found that retirees with substantial assets are the most reluctant spenders. Vanguard recently reported that retirees with very modest savings turn around and reinvest a third of the money they’re required to withdraw under IRS rules after age 70½.
People saved all of their lives to make sure they will enjoy retirement. So why are they so reluctant to spend the money for the purpose it was intended?
A 2018 study in the Journal of Personal Finance surveyed retirees to get a sense of the psychology behind their caution.
Half of the survey respondents agreed with this statement: “The thought of my retirement portfolio balance going down over time brings me discomfort, even if the decline in value is a result of me spending money on my retirement goals.”
And the people who agreed with this statement said they feel like they are not well prepared financially to retire – and this had nothing to do with how prepared they actually are. …Learn More
Half of the workers who have an employer retirement plan haven’t saved enough to ensure they can retire comfortably.
This 17-minute video might be just the ticket for them.
Kevin Bracker, a finance professor at Pittsburg State University in Kansas, presents a solid retirement strategy to workers with limited resources who need to get smart about saving and investing.
While not exactly a lively speaker, Bracker explains the most important concepts clearly – why starting to save early is important, why index funds are often better than actively managed investments, the difference between Roth and traditional IRAs, etc.
Some of his figures are somewhat different than the data generated by the Center for Retirement Research, which sponsors this blog. But both agree on this: the retirement outlook is worrisome.
The Center estimates that the typical baby boomer household who has an employer 401(k) and is approaching retirement age has only $135,000 in its 401(k)s and IRAs combined. That translates to about $600 a month in retirement.
Future generations who follow Bracker’s basic rules should be better off when they get old. …Learn More
About a third of retired households end up relying almost exclusively on Social Security, because they didn’t save for retirement. Social Security is not likely to be enough.
To get Oregon workers better prepared, the state took the initiative in 2017 and started rolling out a program of individual IRA accounts for workers without a 401(k) on the job. The program, OregonSaves, was designed to ensure that employees, mainly at small businesses, can save and invest safely.
Employers are required to enroll all their employees and deduct 5 percent from their paychecks to send to their state-sponsored IRAs –1 million people are potentially eligible for OregonSaves. But the onus to save ultimately falls on the individual who, once enrolled, is allowed to opt out of the program.
More than 60 percent of the workers so far are sticking with the program. As of last November, about 20,000 of them had accumulated more than $10 million in their IRAs. And the vast majority also stayed with the 5 percent initial contribution, even though they could reduce the rate. This year, the early participants’ contributions will start to increase automatically by 1 percent annually.
The employees who have decided against saving cited three reasons: they can’t afford it; they prefer not to save with their current employer; or they or their spouses already have a personal IRA or a 401(k) from a previous employer. Indeed, baby boomers are the most likely to have other retirement plans, and they participate in Oregon’s auto-IRA at a lower rate than younger workers.
Despite workers’ progress, the road to retirement security will be rocky. Two-thirds of the roughly 1,800 employers that have registered for OregonSaves are still getting their systems in place and haven’t taken the next step: sending payroll deductions to the IRA accounts.
The next question for the program will be: What impact will saving in the IRA have on workers’ long-term finances? …Learn More
Amid a growing awareness that many Americans aren’t properly prepared for retirement, various efforts have ramped up to push the non-savers to save.
A notable initiative is occurring in state government. California, Illinois, and Oregon have started IRA savings programs that require private employers to offer the state-sponsored IRAs to workers if the company doesn’t already have a 401(k).
Cell phone apps are also popping up to make saving easier. One such app – Finhabits – is being marketed directly to Latinos, who financial experts say are particularly unprepared for retirement. Two out of three Latino workers aren’t saving in a retirement plan, often because they work in low-wage restaurant and hotel jobs that don’t offer one.
The Finhabits app offers both traditional and Roth IRAs, which can also be set up online. The IRA regularly deducts an amount, designated by the customer, from his bank account and invests the money in low-cost exchange-traded index funds managed by Vanguard or BlackRock.
Carlos A. Garcia created the app – in English and Spanish – to confront a barrier to saving that he experienced in his own family as a child growing up in the border towns of El Paso, Texas, and Juarez, Mexico. Saving “is not part of [Latino] culture,” he said. “Everybody’s working so hard. But you never talk about retirement.”
He carried this sentiment into his first job at Merrill Lynch after college graduation. He turned down the 401(k) option, because “I had no clue what a 401(k) was.”
This blog doesn’t recommend financial products, and Finhabits has advantages and disadvantages over competing apps. The app’s management fee is slightly higher than some, according to expert reviews. Nevertheless, Finhabits follows sound principles, such as investing in low-cost index funds. The Washington state government chose Finhabits as one of its vendors to provide a retirement plan through the state’s Retirement Marketplace for small businesses. …Learn More
Luke Huffstutter felt a great sense of relief when the employees of his Portland hair salon started putting money into a state retirement program designed to make saving easy.
This is much better than the “guilt” he felt over many years of desperate attempts – and not much luck – to convince his stylists and other employees to save on their own. He even brought in a financial adviser once to nudge them.
“I have a responsibility to provide them a path to retirement,” Huffstutter said.
Today, 39 of the Annastasia Salon’s 45 employees have joined some 22,000 others across the state of Oregon who’ve accumulated a total of $10 million for retirement through OregonSaves, a state government program being rolled out over time for residents who don’t have savings plans at work.
Oregon was the first state to introduce this type of program, and California, Connecticut, Illinois, and Maryland are following. New York may be next. Mayor Bill de Blasio is proposing a similar program, because more than half of working New Yorkers lack a retirement savings plan at work.
The absence of a retirement plan is a particular problem at small firms, which often lack the money or staff to set up the 401(k) plans common at major employers. OregonSaves, which is mandatory for employers, provides a very low-cost way to automatically enroll workers and send their payroll deductions to personal IRA accounts.
The main stumbling block appears to be that not everyone is as enthusiastic as Huffstutter. Some employers are taking a very long time – more than six months – to set up the payroll deductions, and others that enrolled are showing lower participation rates than the salon. …Learn More
It might be the most consequential issue baby boomers will deal with when they retire: did I save enough?
Vanguard’s free online calculator will estimate that for you, using the same sophisticated technique financial advisers charge hundreds of dollars to provide.
The user-friendly calculator uses 100,000 of what are called Monte Carlo simulations of potential future returns to the financial markets to arrive at the probability that a household’s invested savings will last through the end of retirement. To get to this number, older workers enter their information into the calculator – 401(k) account balance, asset allocation, estimated years in retirement, and annual withdrawals – by moving around a sliding scale for each input.
The financial industry recommends aiming for a probability in the 80 percent range – 95 percent is overdoing it. In the end, however, your comfort level is a personal decision.
An important purpose of the calculator is to demonstrate how changes in the inputs can hurt one’s long-term retirement prospects – or improve them. One obvious example is increasing the annual withdrawal amount, which lowers the probability the money will last. To increase your chances, try a later retirement date.
The calculator is a lot of fun, but it has some limitations.
First, it’s no substitute for a detailed pre-retirement financial review. The other issues are primarily mathematical, and they boil down to the difficulty of predicting the future.
The calculator assumes, for simplicity, that a retiree withdraws the same dollar amount from savings every year to supplement Social Security and any pension income. But Anthony Webb, an economist at the New School for Social Research in New York, said this ignores the most important thing retirees should do to preserve their money: adjust the withdrawals every year, depending on how their investments have performed.
“If you encounter icebergs (bear markets), you should cut your spending” and withdrawals, he said. …Learn More
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