Retirement Savings with Your Future in Mind
Published on April 4, 2017
Saving for a big ticket item like a car is relatively easy—you determine what kind of car you want, how much you want to spend and then you start saving. Saving for retirement is much more challenging. For instance, how long will you need the money? Since no one knows how long they will live, answering that question and undertaking the necessary savings needed to retire successfully can be tough.
According to the Society of Actuaries, people are living 10 percent longer than they did 20 years ago. Men who reach the age of 65 can be expected to live to an average age of 86.6 and women to 88.8. And, those are only averages. Online longevity calculators such as the Actuaries Longevity Illustrator may provide additional insight into your potential longevity.
With longer life spans on the horizon, individual investors need to get more aggressive about retirement savings to be able to fund their desired standard of living in retirement and avoid falling into longevity risk. Longevity risk occurs when the individual depletes his/her resources before the end of life. This problem can affect anyone but typically hits widows over 85 because income falls by about one-third after the death of a spouse. However, it can happen sooner than that. According to Social Security Administration data, 14.5 percent of widowed women over the age of 65 live in poverty; as well as divorced women (17.1 percent); and those who never married (23.2 percent).
Longer life, lower investment returns
Consider this: A 35-year-old couple with household income of $50,000 would need to save between 11 percent and 13 percent in pre-tax dollars to maintain their standard of living, while the same couple with household income of $100,000 would need to save between 13 percent and 16 percent.
Since investors are experiencing high asset prices on stocks and lower returns on safe assets such as bonds, aggressive savings alone won’t resolve this fiscal challenge. In fact, a consistently low-return environment means the percentage of income a person needs to save to meet a retirement goal needs to increase and also reduces the income a person can expect to receive once that goal is reached. All of this translates into lower expected returns in the future.
If reality bites, bite back
Here are some suggestions to overcome the financial reality:
- Calculate how much income you will need to save for retirement using a lower than expected rate of return. Not sure if you will have enough to retire? Check out CNN’s Money retirement calculator.
- Save more now in order to be able to fund your desired standard of living in retirement. (High earners will need to save even more.)
- Lower the percent you need to save by retiring later. This will reduce the number of years you will have to draw from your nest egg.
- Evaluate your Social Security strategy. You can maximize your Social Security with a delayed benefit claim.
- Self-direct your retirement savings. By taking control of what your retirement savings are invested in, you can maximize your returns.
Self-directed IRAs can provide informed investors the ability to develop a more diversified portfolio that they control. A self-directed retirement plan allows the individual to respond to economic downturns or take advantage of opportunistic (and tax-advantaged) investments with greater flexibility.
At Next Generation, our professionals are available to answer questions about self-directed retirement plans and the alternative assets allowed within these plans, and our transaction specialists ensure that you are investing within IRS guidelines. Since we do not give investment advice, we strongly recommend you consult your trusted financial advisors about your investments and any tax implications they have for your unique situation.