If, like most Americans, your clients didn’t save enough for retirement, they might not have to tighten their belt as much as once thought.
In fact, most retirees can avoid taking drastic measures by combining retirement strategies, according to “Easing The Retirement Crisis: How Financial Planning And Personalized Advice Can Head Off Extreme Austerity,” a recent report by Chicago-based Morningstar.
“When we look broadly at people’s options in retirement, the picture isn’t bleak,” said Stephen Wendel, Morningstar’s head of behavioral science. “So often we focus on the financial fact that there’s no way that people can retire on an individual level, or that they’re really going to have to cut their standards of living. But when they combine different factors impacting their retirement outcome, like lowering their expectations or living in a cheaper place [and] increasing their contributions, they don’t have to do extreme things.”
Wendel ran computer simulations on actual household retirement plans, looking at eight possible actions and how they impact retirement outcomes under various market scenarios: lowering the standard of living in retirement, delaying retirement, allocating more funds to a starting amount, increasing contribution rates, increasing net returns from investing, investing more aggressively, auto-escalating contributions and completely divesting savings.
According to Wendel’s simulations, fewer than 26 percent of working Americans are likely to have what they need to retire under normal market conditions. Under more dire market scenarios, fewer than 20 percent of the population would have what they need. Even among the mass affluent with $100,000 or more in net worth, only 45 percent are projected to have what they would need under normal market conditions, and fewer than one-third would have what they need in bad markets.
Wendel stressed that most households in the simulation were likely underprepared for their retirements, citing academic research that the median 401(k) balance is under $10,000 among working-age U.S. households and an EBRI survey that found just 17 percent of American workers felt like they would be able to retire comfortably.
According to the simulations, the most effective techniques to improve retirement outcomes were also the most basic—increasing savings, investing, delaying retirement and lowering the cost of living. These techniques were also the most effective for mass affluent households.
The least effective technique that still led to positive returns was investing more aggressively, according to the simulations. Divesting entirely had a negative effect on outcomes.
“Investing at all really does matter. The details of asset allocations and returns do not matter as much as participating in the markets,” said Wendel. “Most people just haven’t saved enough for the percentage of allocation to stocks to be a decision that matters to their retirement.”
Wendel cautioned that the impact of each action on retirement success—the likelihood of one’s savings lasting throughout retirement—varied widely from case to case. For example, most of the simulations showed that a delay of retirement of five to 10 years would be sufficient for most people to achieve retirement success, but some outliers only needed to delay retirement by a year or two or less. Others did not achieve retirement success after delaying retirement by 20 years or more.