Retirement saving–it is a topic on the minds of many New York families. The days of working in the same spot for several decades and then enjoying retirement on a defined benefits pension plan are long gone for most residents. With Social Security offering only the barest funds, it instead falls to everyone to take steps on their own to plan for their golden years. Individual Retirement Accounts (IRAs), 401(k)s, and similar tools are used by most to accomplish this goal.
However, the latest research on retirement trends suggest what many estate planners know: many families have no saved nearly enough to last their entire planned retirement. As discussed in a MarketWatch story this week, a new research projects gives most people less than a 50% chance of having their retirement last for 30 years. That is based on current stock and bond markets with a typical withdrawal of 4% per year (with a hypothetical portfolio of 60% bonds and 40% stocks).
In short, it is still tough out there in the world of retirement planning.
As the article points out, this latest analysis offers a somewhat bleaker picture than simulations in past years–which typically show anywhere from 80% to 90% chance of funds lasting for three decades based on those same parameters.
What changed in this year’s study? According to the authors it is a combination of low bond yields and high stock valuations.
It is important to point out that while the headline of “50% of plans failing” seems like a cause for alarm, it might be more sensational than necessary. That is because even a plan that failed after 29 and a half years would be deemed “failure,” even if it was plenty for the actual individual. In other words, following these sorts of estimates are very conservative, and many more than half of the plans will likely still serve their purpose in the real world.
Also, the authors note that, in reality, “by the time you’re 20 years into retirement, there is a more than 50% chance that one spouse in a couple won’t be there any more. So, he said, you can likely ratchet your spending down a bit.”
What Does This Mean for You?
While these pessimistic study results are not welcome, there are still options for families to deal with the changing investment landscape. For one thing, withdrawal amounts can be lowered in order to ensure the nest egg lasts longer. The study is based on a 4% annual withdrawal, but decreasing that to 2% results in 99% likelihood of lasting thirty years. Also, there is no reason that the withdrawal rate must stay constant. Changes can be made on a regular basis to account for changing investment dynamics.