How ready for retirement are baby boomers and Generation Xers? The two groups have different retirement time horizons, but both have expressed concerns whether they will be able to save enough to enjoy a comfortable retirement.
In 2017, only 32 percent of boomers reported saving more than $250,000 for retirement. That’s one-fourth of the generally accepted amount a retiree needs to last a lifetime.
Meanwhile, many Gen Xers (ages 37-51) report feeling burdened by student loan and credit card debt and unsure about being able to save enough for retirement. So, it’s very likely that many of your clients are facing a retirement savings deficit and need your help in catching up.
Often, this shortfall is due to unforeseen, sudden life events that aren’t easy to plan for—the loss of a job, divorce or death of a spouse, care-giving responsibilities, or even major stock market downturns.
Thankfully, there are several strategies that can help your clients overcome a retirement savings gap. This article will explore some possible options that can assist them in: saving more and spending less during accumulation and in retirement, identifying alternative savings vehicles and protecting against or mitigating different risk factors.
Saving More, Spending Less
One obvious-sounding solution is not as simple as it may seem: saving more and spending less before retirement. A good starting point is helping your clients understand how reducing their discretionary spending on items such as vacations, new cars or a larger home can significantly reduce the amount of income they will need in retirement. Even a modest reduction in spending now can pay big dividends down the road, allowing your clients to more closely match their current standard of living in retirement.
Another potential way to reduce current costs is mortgage refinancing, assuming your clients plan to remain in their home long term and can qualify for a lower interest rate (due to an improved credit score or a low interest rate environment). Ultimately, they would have to consider the fees associated with the refinancing and compare that to the potential monthly savings to decide if will reduce their costs.
Salary increases or additional sources of income can also be used to raise the rate of pre-retirement saving. Some examples of these “extra” income sources include: bonuses, raises, inheritance, tax refunds and money freed up by becoming empty nesters. Encourage clients in these scenarios to defer their bonus or raise into their employer sponsored plan instead of receiving the income. In this way, the extra money cannot be missed if it was never received it to begin with. While this is a sacrifice of certain pleasures now—the extra funds could be critical for success later.
Mitigating Risk And ‘Seeking Alpha’
As retirement draws closer, it becomes increasingly important to mitigate risk by reducing the downside potential within a portfolio. Taking on too much market risk can lead to serious damage to a retirement account.
Using a hypothetical example, if your client’s assets lost 20 percent of their value due to stock market losses, they would need a total return of 25 percent the following year to break even. Assuming a modest 2 percent compound annual gross rate of return, it could take them more than 11 years to make up that loss. Even if we assume a higher rate of, say, a 6 percent compound annual gross rate of return, it could still take 3.8 years to recover that loss.
Article published by Financial Advisor June 19 2018
Written by Kelly Lavigne