What Do You Need to Retire Comfortably?

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As a result of the coronavirus, many individuals are taking a closer look at the issues related to retiring comfortably. Schwab’s Retirement Plan Services unit recently published a survey using information from their clients holding 401(k) accounts. On average, plan participants say they needed to save $1.9 million for a comfortable retirement.

Naturally, the amount which needs to be saved depends on many factors. For example, an individual who waits until 70 to apply for Social Security benefit will be able to retire with a smaller investment account. Another important issue is other income sources. Although most companies no longer offer “defined benefit” retirement plans, individuals fortunate enough to have a pension obviously can have a comfortable retirement with a lower amount saved in their 401(k) plan or IRA account.

So, what kind of retirement would $1.9 million in savings get you? If you were to use it to buy a single premium immediate annuity (SPIA), as a 65 year-old man, you could receive approximately $9,188 per month ($1,268 taxable) from a top-rated insurance company. If you bought a joint life annuity, for a 65-year old man and a 65 year-old spouse, you would be entitled to $7,762 per month ($1,428 taxable).

According to the Schwab survey, 41% of respondents have made changes to their 401(k)s as a result of the coronavirus and its economic impact; 14% have rebalanced their portfolio; 12% have increased their contribution rate; 8% have increased their stock funds/equity allocation; and 7% have decreased their allocation. One in four respondents consulted a financial professional, and two-thirds of them made changes in their accounts. Twenty-six percent rebalanced; 22% increased their contribution rate; and 17% increased their stock market exposure.

Wenliang Hou, an economist for the Center for Retirement Research at Boston College, identified five sources of risk that a “typical” retiree would face in retirement. They are:

–Mortality or longevity risk: either dying young without using all the funds saved, or living longer than expected after all the funds were spent

–Market risk, such as poor stock market returns or decline in housing values

–Health risk, such as unexpected medical expenses or long-term care expenses

–Family risk, such as death of spouse, or unforeseen needs of family member

–Policy risk, such as Social Security benefit cut, or insurance company bankruptcy

Hou believes that many retirees underestimate their health costs in later life. Hou identifies three policy implications associated with his research.

–He believes that many retirees don’t have an accurate understanding of their true retirement risks. This underscores the importance of retirees to staying educated regarding the actual sources of retirement risks.

–A need exists for lifetime income products such as annuities, which hedge longevity risk and market risk.

–Retirees often underestimate the significance of long-term care. Hou suggests that retirees with limited resources consider options available with life annuities to help cover long-term care costs. A reliable insurance agent should be able to assist you with such alternatives.

I agree, which is why I recommend reliable sources such as Stan Haithcock (www.stantheannuityman.com), who is very knowledgeable and only recommends cost-effective products. If you wanted to know the monthly amount you could receive from a SPIA, you can use his calculator at https://stantheannuityman.com/spia-calculator. For an estimate, you can enter some personal information, that of your spouse (for a joint annuity), and whether the funds originate from an after-tax source, or an IRA or 401(k). Specify the amount of your investment, your birth dates, your resident state, and you will receive multiple estimates from high-rated insurance companies.


(Article written by Elliott Raphaelson)