Why We Can’t Get Retirement Right

Americans have long absorbed the dreamy images of retirement. Couples living happily by the sea shore, traveling to exotic places or entertaining family and friends in luxurious homes.

Financial advisors have embraced these portraits in order to motivate people to save or invest more for retirement. But retirement planning has become dominated more by fantasy than reality. 

Even in cases where individuals can fulfill their financial needs, other obstacles cloud their way, whether it be forced early retirement, disputed succession plans, unforeseen health issues, and lack of fulfilling activities.

Retirement planning needs to take into consideration possible obstacles, especially financial.  Just recently the pandemic and high inflation are just two examples of how plans could get sidetracked.

New Thinking on Finances 

According to a recent study, “The New Social Contract: Future-Proofing Retirement,” nearly 40% of workers are concerned they will not have enough funds to see them through retirement

People are living longer, expect to encounter higher costs and worry about growing medical bills. The traditional approach has been to plan on spending no more that 4% of savings their first year of retirement then adjust it annually to meet inflation.

But a new report from Morningstar recommends not spending more than 3.3% of savings in the first year and subsequently adjust for inflation. The goal is to stretch savings as life expectancy continues to rise.

What’s more, if current high inflation levels persist, some advisors say that reductions to the 3.3% level are optimistic. Further belt tightening might be required.

Why don’t workers invest more for retirement? Certainly, other financial priorities are pressing, including college education, mortgages and credit card debt. Also, some workers seem to be unduly confident they will have enough funds for retirement. The Employee Benefits Research Institute Annual Retirement Confidence Survey found that workers’ confidence in their ability to live comfortably in retirement remains high overall, with 8 in 10 confident they will have enough money to live comfortably throughout retirement, including 1 in 3 who are very confident. 

Still, uncontrollable events do cast a shadow over this confidence. This same research revealed the impact of the pandemic with a third of workers and a quarter of retirees feeling somewhat or significantly less confident they will have enough to live comfortably throughout retirement.

In addition, health care costs are rising out of control. Many retirees are waking up the fact that despite its generous benefits, Medicare is not enough to pay for spiraling health care.  Supplemental plans are now a necessity.

Early Retirement

There seems to be a major disconnect between the wish to retire early and the real reasons for early retirement. Many individuals would like to retire at age 55 or 60 but a survey by Allspring Investment showed that almost half of workers surveyed feel they cannot retire early because their medical coverage is paid for by employers and they would lose coverage.

On the other hand, the recent pandemic revealed that many were forced to retire early for health reasons.

Out of 51% of those surveyed by Goldman Sachs (Retirement Survey and Insights Report) which indicated they would retire early, some 25% said the reason was driven by healthcare.

“Half of today’s retirees report that they retired earlier than expected – cutting short the typically highest-earning and highest-saving years – citing health issues and employer decisions as the key drivers for retirement,” noted the Allspring Retirement Survey, conducted by Harris. 

Relatively Affluent Also Concerned

 A Natixis survey of people with at least $100,000 in investable assets indicated that a secure retirement was not guaranteed. Some said “it will take a miracle to retire securely.” Half of respondents with a net worth of $1 million or more said they were resigned to the fact of having to work longer than they’d anticipated. In the U.S., the 750 survey respondents had a median net worth of $450,000, $250,000 in retirement savings and had saved on average more than 16% of their salary.

“What shocks me is that these are the people doing pretty much all the right things and even that isn’t enough to feel secure,” said David Goodsell, executive director of the Natixis Center for Investor Insight.

Botton line:  escalating costs, especially of health care, are driving retirement planning decisions.