The 2018 Retirement Confidence Survey (RCS) conducted by the Employee Benefit Research Institute (EBRI) and research firm Greenwald & Associates, found that only 32% of retirees are very confident in their ability to live comfortably throughout retirement . But what does that mean for the remaining 68% of retirees who are less confident? Equally important, what does it mean for working Americans actively saving for life in retirement?
As the longest-running survey of its kind in the nation, the RCS explores the retirement outlook of both workers and retirees on an annual basis, providing a glimpse into the financial challenges retirees and pre-retirees face and how those challenges translate into confidence in their ability to achieve and maintain their desired lifestyles for 20 or 30 years in retirement. The results are not only revealing but offer valuable learnings for people at all stages in the retirement planning—whether you’re just starting out in your career or preparing to retire in the next few years.
For example, according to the survey, while two out of three workers expect to continue working full or part-time to generate income during their retirement years, only one in four retirees actually cite work as a source of income in retirement. The problem with relying on paid work in retirement is that life may have different plans for us. Unexpected circumstances, such as an injury, illness, a layoff, or other situations outside of your control can force you to stop working earlier than you planned. That makes relying on work alone to support your daily living expenses later in life a risky proposition.
However, putting yourself on the path to a confident retirement may not be as difficult as it seems. Taking steps to avoid the following common retirement planning mistakes can go a long way toward replacing uncertainty with confidence, now and throughout your life in retirement.
Mistake #1: Not saving enough
A Northwestern Mutual study released in 2018 reports that “one in five Americans (21%) have no retirement savings at all and one in three Baby Boomers (33%), the generation closest to retirement age, only have between $0-$25,000 in retirement savings.”
- How to Fix it Now: Contributing the maximum amount annually to any workplace retirement plans you’re eligible to participate in is one of the most effective ways to boost retirement savings, especially if your employer also offers matching contributions. Most employer-sponsored defined contribution plans offer both traditional (pre-tax) and Roth (after-tax) contribution options. And next year, you’ll be able to contribute even more to qualified retirement plans. In November, the IRS announced that retirement plan contribution limits will rise in 2019. That means 401(k), 403(b) and most 457 plan participants may contribute up to $19,000 in 2019, an increase of $500 over the 2018 limit. Individuals aged 50 and older can contribute an additional $6,000 in 2019 through “catch up” contributions for a total of $25,000 for the year. Likewise, annual contribution limits for traditional and Roth IRAs in 2019 will increase to $6,000, up from $5,500 in 2018. Those age 50 and over can contribute an additional $1,000 in catch-up contributions for a total annual contribution of $7,000 in 2019.
Mistake #2: Investing too conservatively
How you invest your retirement plan contributions is another critical determinant of retirement readiness. Many investors choose overly-conservative strategies that don’t enable the level of earnings growth needed over time. But by avoiding the stock market, they’re not eliminating risk – they’re simply shifting it to the possibility that their account values may not outpace inflation over time, which may result in outliving their assets. Keep in mind, you don’t need the full balance of your portfolio the day you retire. You’ll draw down on the balance over time to support your income needs. So you want your portfolio to keep generating income over time to help support your lifestyle for decades to come.
- How to Fix it Now: Determining the investment strategy that’s right for you depends on many factors from your goals and lifestyle needs to your personal tolerance for risk. For example, advisors work with each client to develop a personal Family Index Number: The individual rate of return designed to help you work toward achieving your goals and objectives. The Family Index Number is based on input, including analysis of the client’s current strategy, documented goals, risk analysis and scenario planning, among other factors. The Family Index Number helps to increase confidence that you’re on track toward your individual goals. It’s not about taking on more risk or subjecting portfolios to undue market volatility. Instead, the Family Index Number is used to design a personal portfolio allocation to meet your needs while potentially lessening the financial risks inherent in a strategy that’s too conservative or too aggressive to meet your needs.
Mistake #3: Underestimating expenses in retirement
According to the RCS, retiree confidence in having enough money to cover basic expenses and medical expenses dropped in 2018, with 80% of survey respondents saying they were very or somewhat confident about covering basic expenses, compared to 85% in 2017. However, retirees’ confidence that Medicare and Social Security will continue to provide benefits equal to what retirees receive today has significantly declined compared to last year, with only 46% saying they are very or somewhat confident vs. 51% in 2017. In addition, only 7% say they are very confident that Medicare and Social Security will continue to provide the same level of benefits they do today.
- How to Fix it Now: There’s no question that estimating your expenses in retirement is complicated. Will you spend more or less than you do today? That depends on your lifestyle goals. If you plan to travel extensively, buy a vacation home or spend more time on social and leisure activities, your expenses are likely to go up – even though you’re no longer commuting to work or supporting dependents. As you age, medical and healthcare expenses are also likely to rise and you’re responsible for covering expenses that Medicare doesn’t, including long-term and nursing care costs which can easily hit $100,000 or more annually, depending on where you live. This is where a comprehensive financial plan can help. Having a plan in place will not only help you estimate future expenses, based on your lifestyle goals and preferences, it can also help you plan for both expected and unexpected events, such as the impact of inflation on your income, a financial market downturn, illness or incapacity, or the death of a spouse. Through sophisticated scenario planning, your advisor can demonstrate the impact of different situations and circumstances on your projected retirement income sources, helping you to make the best possible decisions for your future.
Mistake #4: Failing to follow-through on professional advice
If you suffer from a chronic condition, whether it’s heart disease, diabetes, or another condition, you know that failure to follow your doctors’ orders when it comes to medication, exercise and nutrition is probably not going to lead to the long-term outcome you desire. More than likely, without intervention, the disease or condition will only get worse, further hampering your ability to live a more active and fulfilling lifestyle. We see similar situations when people make the effort to meet with an advisor to develop a financial plan, but don’t follow through on that advice. Generally, the end result is the same. They fall short of desired outcomes, which can have an adverse impact on their quality of life in retirement.
- How to Fix it Now: There are many reasons people fail to follow through on financial advice they receive. If the advisor you’re working with just isn’t a good fit for you or it becomes clear that the advisor simply wants to sell you something and doesn’t have your bests interests in mind—that’s a good reason to avoid implementing the advisor’s advice. However, if you’re working with a financial planner or advisor who is acting in a fiduciary capacity (the advisor is required to operate with your best interests in mind at all times), you may be shortchanging your future by not following through on recommendations. That’s because an advisor serving in a fiduciary capacity is bound by the standards of his or her profession to bring the right resources to bear in helping you identify, anticipate and overcome financial challenges at every stage of your life. If it’s been more than two years since you met with your advisor or reviewed your financial plan, consider whether or not that advisor is the right fit for you. The client-advisor relationship should always be predicated on partnership, trust and a mutual desire and motivation to help you move closer to your goals. Think of your advisor as your personal financial fitness coach, someone who is clearly in your corner and rooting for your success. If you’re not feeling that vibe in your current relationship, it may be time to find another advisor.
Regardless of the mistakes you have or haven’t made in the past, what’s important now is that you have a plan in place for how you will replace your income when you’re no longer working. And, that is the first step to getting yourself “retirement ready.”