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Developing An Income Plan<\/h2>\n\nA not-so-funny thing happens to many Americans on the way to retirement \u2014 they save and accumulate money for retirement, only to realize that when they do get ready to retire, they\u2019re not sure that their saved money will last.<\/p>\n
\nUnfortunately, many retirement savers have been conditioned to think only about saving a magic lump sum number from which they can start withdrawing money each year after they retire. Little attention is paid to calculating how much actual income they\u2019ll need each month to live on and if that money will last throughout retirement.<\/p>\n
\nThe Protected Lifetime Income Index study, a recent survey of 3,119 adults by the Alliance for Lifetime Income, shows that a mere 28% of non-retired Americans have made an effort to determine their likely monthly income needs in retirement \u2014perhaps the single most important thing people should be planning for.<\/p>\n
\nEven among those closest to or in retirement \u2014 Americans between 55 and 74 years of age \u2014 only 43% have made such a calculation.
If people don\u2019t know what they\u2019ll need, how will they know if they\u2019ve saved enough to last throughout life? It\u2019s no wonder that the survey showed 80% of us are anxious that our savings may not be enough to live on or last through retirement.<\/p>\n
\nThe study shows that two-thirds of Americans look forward to their retirement with hope and optimism, seeing it as a long-awaited opportunity to pursue their personal interests.<\/p>\n
\nMany survey respondents said they look forward to this next step in life and believe they will be more adaptable, more spiritual and have more free time to pursue their varied interests.<\/p>\n
\nWhile spending on restaurants, travel and the like are technically discretionary expenses, they are nevertheless a staple of retirement living for most Americans. After all, these are the experiences many retirees have waited their entire working lives to enjoy, and the main reason why most of us indicate in the study that we\u2019re optimistic about retirement.<\/p>\n
\nWhen it comes to nondiscretionary spending however, we must begin with understanding the rising costs of health care, especially as we age. A July 2019 study sponsored by the National Association of Plan Advisors found that a healthy 65-year-old couple retiring in 2019 is projected to spend $369,000 in today\u2019s dollars ($551,000 in future dollars) on health care over their lifetime. In addition, expenses at age 85 are estimated to be 250% higher than at age 65.<\/p>\n
\nThe study further estimates that a healthy 67-year-old retired couple is projected to spend 39% of their pre-tax Social Security benefit on health care in 2019. This estimate is based partially on the December 2017 average monthly pretax Social Security benefit at age 65 to 69 of $1,388 for retirees and $817 for spouses is used, with adjustments to 2019.<\/p>\n
\nOther nondiscretionary costs \u2014 housing, transportation and food, for example \u2014 have a significant impact on the cash flow of many retirees. For example, even if one\u2019s home is paid for, the costs of utilities, maintenance and possibly larger home repairs are not insignificant, especially when including the cost of inflation.<\/p>\n
\nFinally, a study by David Blanchett, Morningstar\u2019s head of research, shows that retirement spending doesn\u2019t always follow a straight path. Instead it\u2019s more of a smiling curve, where we spend more money in our early years of retirement, gradually decrease, and then our spending is high once again toward the end of our lives, thanks in large part to the rising costs of health care.<\/p>\n
\nWhether it\u2019s discretionary or nondiscretionary spending, the bottom line is that Americans should be calculating their estimated expenses for both those categories in retirement, all while anticipating living a longer life. Unfortunately, the studies indicate that most of us are not.<\/p>\n
Developing An Income Plan<\/h2>\n\nOnly 42% of non-retired Americans believe their savings and sources of income will last their lifetime, according to the Protected Lifetime Income Index study. This backs up the statistic that running out of money in retirement is their No. 1 fear. And there\u2019s good reason for that concern.<\/p>\n
\nToday, 63% of Americans are unprotected for retirement, meaning they have no guaranteed source of protected lifetime income \u2014 such as a pension or annuity \u2014 other than Social Security. A June 2019 World Economic Forum report estimates that a 65-year-old American today could outlive their retirement savings within nine years.<\/p>\n
\nOne of the reasons many Americans experience an income shortfall in retirement is because, when preparing for retirement, they follow a retirement savings plan when they should be following a retirement income plan.<\/p>\n
\nRegardless of how your client saved for retirement, a first step in developing an income plan should be to make a realistic budget based on their financial obligations and lifestyle interests (discretionary and nondiscretionary) in retirement, and then accounting for their various sources of income. Equally important is considering the real possibility that they will live for 20, 30 or more years in retirement.<\/p>\n
\nSince Social Security on average only covers about 40% of pre-retirement income, for many Americans this exercise will likely reveal a gap in guaranteed income \u2014 income your client can count on receiving each month or year for the rest of their life. That\u2019s the income that could give retirees peace of mind by covering all or part of those nondiscretionary expenses, while the other retirement savings can go to work covering the discretionary ones.<\/p>\n
\nWith the dramatic decline in pensions, today\u2019s pre-retiree is faced with only one way to fill that guaranteed income gap: an annuity.<\/p>\n
\nWith millions of pre-retirees facing the high probability of running out of money in retirement, it\u2019s incumbent on financial advisors and the broader retirement planning industry to educate and help consumers develop truly diversified retirement income plans. These plans must take into account those nondiscretionary and discretionary expenses, and then determine whether a guaranteed income gap remains.<\/p>\n
\nAny persistent guaranteed income gap should be addressed by action in the best interests of retirement savers by protecting them with lifetime income they can count on from an annuity. Only then can they lead the life they want in retirement, however long that may be.<\/p>\n