Many Americans’ financial plans — or lack thereof — have them on a track to an unpleasant retirement. Lack of knowledge is behind much of the problem, whether the individual is unaware of investment strategies, hasn’t figured out how much they need in retirement or has unrealistic expectations.
This phenomenon, what CBS MoneyWatch writer Steve Vernon
calls retirement schizophrenia, poses a serious threat to your clients’ financial future. In the spirit of Financial Literacy Month, double check with your clients that they aren’t relying on unrealistic expectations or ignoring important steps they should be taking to prepare.
Working in retirement
Most working Americans plan to work past the traditional retirement age or work in retirement to help pay the bills, but how realistic is this?
“Actual retirement age reported by current retirees has remained constant at age 62 for the past several years of the EBRI survey,” writes Vernon. “Half of current retirees say they left the workforce unexpectedly due to health problems, disability, or changes at their employer, such as downsizing or closure. Only 27 percent of current retirees report that they worked for pay during retirement.”
In sum, Vernon’s findings show that even if most people want to work in retirement, it’s unlikely they’ll be able to.
Relying on Social Security
American workers are pessimistic in their expectations for Social Security income — just 6 percent believe they’ll get the same level of benefits as retirees today. Vernon says these pessimists likely are correct that they won't get the benefits retirees have today, but the program isn’t going anywhere.
“Social Security is one of the most popular government programs and I believe we'll have Social Security as long as we have democracy,” Vernon says. “Given the current financing issues, however, it's inevitable that we'll see some reductions in future Social Security benefits, particularly for workers under age 55.”
Breaking news today underscores Vernon’s point. The trustees announced the Social Security trust fund
is expected to run out of money by 2033.
The 4 percent rule
This theory says that if you spend a maximum of 4 percent per year of your retirement funds, the principle will decline slowly enough that you won’t outlast your money. Trent Hamm, in a blog for the Christian Science Monitor
, says the theory ignores two important factors.
“First, market volatility, which has battered retirement savings over the last decade, and second, inflation, the silent force that erodes purchasing power year after year,” says Hamm.
Rather than relying on theories like the 4 percent rule, Hamm says there is one sure way Americans can have more in retirement.
“The more money you save for retirement, the more money you’ll have when it comes time to retire,” he writes. “The solution is simple. You can either save as much as possible for retirement now so you don’t really have to worry about this too much. On the other hand, you can save less and accept that your final years will likely involve leaner living.”
Long term care
Americans know they need to plan for long term care, but many aren’t doing it. The U.S. has 100 million residents age 50 and older, yet just 8 million have long term care insurance. Furthermore, it’s getting increasingly difficult to purchase LTCI — especially for older clients.
Yes, carriers are leaving the market, but the bigger issue is that more people are getting denied
. Eleven percent of applicants under age 50 were denied in 2010, compared with 7 percent in 2007; 17 percent of those in their 50s were denied, up from 14 percent; and 24 percent of applicants in their 60s were denied, an increase from 23 percent, according to the American Associated for Long-Term Care Insurance.
Saving while in debt
Starting to save now is especially important for younger Americans who may not have started saving or are saving less than their pre-retiree counterparts. Younger clients are likely to be paying off student loan debt, and that will be their first priority, but they shouldn’t forget to save for retirement.
However, the unemployment rate for the youngest people in the workforce is higher than the national average, indicating fewer have access to 401(k) plans.
“At the moment, the unemployment rate among Gen Yers stands at 9 percent, according to the Bureau of Labor Statistics. That's 0.8 percent higher than the national average of 8.2 percent,” writes Jennifer Leigh Parker
for CNBC.com. “Without a job, retirement savings stops.”