Are you prepared to retire?
More than half of Americans surveyed told pollsters they had a plan in place to retire by that age.
The survey polled 2,000 U.S. adults between the ages of 40 and 79, who had at least $25,000 in investable assets.
In my experience as a financial planner and investment advisor, Americans often believe they are on track to retire, but a comprehensive plan (sometimes even a quick glance at the numbers) reveals shortfalls.
The TD Ameritrade study uncovered some of those shortfalls.
Among respondents in the age groups approaching retirement, here are the amounts they have saved for retirement:
Less than $50K: 37%
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$1 million or more: 8%
Less than $50K: 28%
$1 million or more: 12%
While some of those amounts may sound like a lot of money for retirement, they may be deceptive. For example, as back-of-the-envelope math, a 67-year-old couple with $500,000 saved could run out of money in about a decade, if they have fairly frugal lifestyle expenses of $50,000 per year.
One piece of good news: The TD Ameritrade study did show that Americans are adaptable: 81% of respondents said they are shifting their financial strategy to prepare for a longer life expectancy.
How Much Will Retirement Cost?
In fact, accounting for a longer-than-expected life is a key tenet of financial planning.
That’s where it’s crucial to understand how much retirement will cost. If Americans opt to retire at age 67, the age when people born in 1960 and later are eligible for their full Social Security benefit, they need to anticipate living another 20 years, or even more.
It’s true that Americans have been hearing end-of-the-world retirement scenarios for decades. While we’ve yet to see the worst predictions play out, there’s no denying that many Americans are unprepared for retirement, even as that day approaches.
It’s also true that the Boomer generation has it tougher than its predecessors, in some ways.
Longevity is increasing, especially among higher earners. The life expectancy for women and men has increased over the past 40 years. Also, corporate pensions have all but disappeared. Those benefits meant Americans didn’t have to save on their own for retirement; many in the Boomer generation never developed that habit, despite not having the backstop of a pension.
Retirement has also become more complex, and a dizzying array of financial products can add confusion.
However, the Boomers enjoy some advantages unknown to their parents and grandparents. Asset allocation is much easier today, due to inexpensive exchange-traded funds. Investors can fully diversify with a broad basket of domestic and overseas stocks of all market capitalizations. That means it’s easier to smooth returns with other assets when U.S. stocks decline.
Boomers Benefit From Fintech
Financial planning technology also makes it easy for today’s pre-retirees to get a good understanding of what their future cash flow, taxes and other scenarios will look like.
Have you run retirement scenarios to determine what your income will be? Do you understand the risk levels in your portfolio? The implications of taxes on your retirement income? The best time to take Social Security?
Here’s a word of warning: Don’t try this at home. Hire a qualified financial planner.
I’ve seen complex do-it-yourself spreadsheets that failed to anticipate potential pitfalls. In one case, I worked with a widow whose engineer husband devised thorough spreadsheets that looked great – yet, when he passed away, there were gaps in her income that he hadn’t accounted for.
Don’t cripple your own retirement by neglecting to understand what you’ll need to sustain a comfortable life, or, even better, the retirement you dream of.