Many Americans who started saving for retirement when they entered the workforce likely had an idealized picture in mind of what retirement would be like when they got there. This includes what their lifestyle might look like, whether it’s being closer to family, traveling, or downsizing to a smaller home.
However, as inflation hits 40-year highs and recession fears continue to mount, many are wondering if a “traditional” retirement is still realistic. The answer is “yes”, but getting there requires foresight and planning. By taking a few steps to ensure that their assets are protected from the effects of inflation and that they don’t outlast their money, people can increase their chances of achieving a fulfilling and enjoyable retirement.
Market challenges
According to a recent F&G poll, 80% of Americans age 50 and older worry about the impact of inflation on their retirement. That’s not too shocking given historical inflation levels, but what stands out is that 61% of retirees are actually changing their budget for day-to-day expenses like food and healthcare.
Financial pressures have caused some Americans to look at their retirement savings and realize they might need to continue working part-time to make ends meet once they retire. In fact, almost a third (31%) of pre-retirees say it is unrealistic for them to retire without working at least part-time and 50% of pre-retirees say they expect to work to some extent until retirement. age of 70.
While inflation is a big part of this puzzle, fears of a recession, as well as rising health care costs, also loom large. In the F&G survey, 71% of respondents were very or somewhat concerned about a retirement recession. Similarly, 65% were concerned about healthcare and/or long-term care costs for themselves or their retired partner. If market conditions continue to decline, it is possible that more retirees will return to work to some degree to make ends meet.
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Unknown longevity risk
It is true that as you age, the age at which you are expected to live also increases. In this environment, it is more important than ever for Americans to not only ensure they are protected against market volatility, but also to take steps to ensure that their savings last their lifetime. Longevity risk is often overlooked, but it’s especially important to consider when building a savings base to cover essential expenses as well as unexpected costs like healthcare in retirement.
No matter how prepared a retiree may feel, no one wants to run out of money when they reach their 85th birthday if they can live another 10 years.
According to a study by the American College of Financial Services, a healthy 65-year-old woman has a 50% chance of living past age 90, a 25% chance of living into age 95, and nearly 10% chance of living to age 100. If she spends her savings at a rate that would run out at age 90, she is 50% more likely to have to cut savings at age 80 or run out of savings. If she spreads her savings out to age 95, she still faces a significant risk that her savings will not be sufficient for her planned lifestyle.
A retiree who does not want to run the risk of running out of money will have to spread his savings over a number of years. Spreading her savings out to age 100 will mean spending a lot less than if she spread her savings out to age 90. In this hypothetical scenario, prudence may motivate her to cut unnecessary expenses to deal with the risk of unknown longevity – potentially not allowing her to fully enjoy life in retirement.
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Missed Opportunities
One of the biggest missed opportunities is when individuals don’t shift their asset allocations appropriately as they approach retirement. While the F&G survey found that 67% of Americans ages 50 and older want a stable income in retirement, too many still rely on stocks (47%) and savings accounts (75% ) at retirement, which generally do not provide inflation or market protection. risk. The large percentage that relies on equities to fund their income can be concerning, as the risk of market loss early in or even approaching retirement can potentially force a retiree to readjust their retirement date or style. expected life.
Solve the problem
There is no “one size fits all” retirement plan, which means Americans can’t be passive with their retirement savings. Instead, they need to create a personalized short-term and long-term plan. If they’re worried about the impact inflation might have on them, or if they’re not already planning for longevity risk, there’s no better time than now to reassess their portfolio.
Fortunately, retirees have several options. For example, an annuity that promises a steady stream of income can protect against the risk of outliving savings. When evaluating these, it is important to carefully review the terms or consult an advisor to determine which one is right for a person’s specific financial needs. For example, some annuities protect against the rising cost of inflation, while others provide capital protection that can mitigate the effects of an economic downturn on retirement savings, but may be limited in amount. that they offer. Still others offer lifetime income guarantees similar to traditional pension plans.
By speaking with a financial advisor and taking the necessary steps to do their due diligence, retirees can find the right mix of products and solutions that work best for them to achieve their financial and retirement goals. If they can do that, Americans can worry less about whether they will be able to retire and more about enjoying their retirement.
Chris Blunt is president and CEO of F&G, a provider of annuities and life insurance, and Michael Finke, Ph.D., is professor and Frank M. Engle Professor of Economic Security at the American College of Financial Services..