What Retirees Want, Affording Retirement

Today we continue our coverage of the great retirement book What Retirees Want. It is packed full of great information and statistics about the state of retirement today.

If you’ve missed any posts in this series, there are two ways to catch up. You can begin with the first post, which is an introduction and overview of the book, and click through to the next posts at the end of each one you read. Or you can check out my retirement category and scroll through the posts there.

Like with other books I’ve reviewed on ESI Money, I will share some key passages from this one and give my thoughts on their conclusions.

Today we’re talking about affording retirement.

Let’s get started…

Affording Retirement

This post will cover several aspects related to affording retirement.

But before we get into the details, I want to share the book’s title for this chapter (chapter 9) because by itself the title says so much:

Retirement is the Biggest Purchase of a Lifetime – That Many Can’t Afford

There are two awesome points made here:

• I’ve said this a gazillion times: retirement is a multi-million dollar decision that can last several decades. So yes, it’s the “biggest purchase of a lifetime.” I generally say this in the context of how little most people spend on planning such a huge purchase — about the same amount of time they take deciding what topping to put on their pizza. But I digress…
• We’re going to get into how many are ill-prepared for retirement in a moment, but it’s a lot of people. And no, it’s not because the system is against them. Most people aren’t prepared financially for retirement for two reasons: 1) they don’t think about planning/saving for retirement until they hit 50 or so and 2) they are mostly spenders, not savers, thus they spend their retirement funds on Starbucks and the latest iPhone versus investments.

Ok, I feel better having those off my chest. Hahaha.

Now let’s get into the subject, starting with this:

People save for retirement gradually, but if you think of the ultimate price tag, it’s the biggest purchase of a lifetime. Retirement costs far more than all of life’s other big-ticket items – buying a home, raising a child, paying for college. The average “cost” of retirement is over $1,000,000. The cost keeps going up, not only with inflation, but also with longevity. As people spend more years in retirement, they’ll need a lot more funds.

Most Americans are unaware of that price tag. A truly alarming eight in ten have reported that they have no idea how much money they’ll need for a comfortable retirement. But they are beginning to realize that they are underprepared – in many cases by a great deal. Only 45% of Americans over the age of 60 feel their retirement savings are on track. In fact, the average 60-year-old pre-retiree has saved only about $135,000 toward their retirement.

How far behind are Americans in funding their retirements? The answer depends on whom you ask and how it’s measured. Using the rule of thumb that retirees need 75% of their pre-retirement annual income, the Center for Retirement Research at Boston College estimates that half of all working households are at risk of being unable to maintain their standard of living in retirement based on their current savings and retirement income sources. Half of the households age 65+ are in the same situation. And half of all Boomers feel they need to catch up on retirement savings. They say they have fallen behind because of inadequate income, unexpectedly having to support family members, out-of-pocket health care costs, and having started saving for retirement too late.

Another rule of thumb says that total retirement savings should be at least eight times pre-retirement income. For the average household, that’s almost a half-million dollars. That $135,000 average falls far short. And a significant number of households have no retirement savings at all, including 13% of those age 60+ and not yet retired.

Lots to comment on here:

• “The biggest purchase of a lifetime.” Unless you have a huge, expensive house, retirement is your largest purchase. It probably is anyway since if you have a huge, expensive house your retirement is probably super-sized as well.
• “The average ‘cost’ of retirement is over $1,000,000.” One “cost” they don’t count for early retirees is lost income. For example, I estimated I “lost” $3 million by retiring early. So add this to the bill and retirement really is the most expensive purchase you’ll ever have. BTW, that $3 million was the best money I ever spent. 😉
• “Most Americans are unaware of that price tag.” Does this surprise anyone? Americans are, on average, so clueless about managing money and terrible at it that’s it’s surprising any of us have any of it figured out.
• “Eight in ten have reported that they have no idea how much money they’ll need for a comfortable retirement.” So why is this? This isn’t some sort of unsolvable mystery. Why do 80% have “no idea” what retirement will cost? Is it because they haven’t thought about it? Ding, ding, ding! We have a winner!!!
• “Only 45% of Americans over the age of 60 feel their retirement savings are on track.” Two thoughts: 1) if you’re way behind at 60, you’re not going to be retiring (at least a good retirement) before 70 and 2) my guess is that while 45% “feel” they are on track, there’s a large percentage of that who are mistaken — they may feel they are on track but they aren’t.
• “The average 60-year-old pre-retiree has saved only about $135,000 toward their retirement.” In his new book, What the Happiest Retirees Know, Wes Moss says the happiest retirees have at least $500k saved for retirement. That seems low to me, but he has research that backs it up (FYI, $500k is the minimum, happiness goes up with more but doesn’t go up a ton more.) Unhappy retirees have less than $500k. Looks like the average American is on track to be unhappy in retirement…
• “The Center for Retirement Research at Boston College estimates that half of all working households are at risk of being unable to maintain their standard of living in retirement based on their current savings and retirement income sources.” This would match with the 45% who feel they are on track above…
• “Half of the households age 65+ are in the same situation. And half of all Boomers feel they need to catch up on retirement savings.” This also matches the 45%…so maybe it’s correct.
• “They say they have fallen behind because of inadequate income, unexpectedly having to support family members, out-of-pocket health care costs, and having started saving for retirement too late.” Obviously, some people have had financial challenges that none of us could overcome. But most (by far) Americans are behind because they SPEND too much (not make too little). The only thing I believe from that list of reasons they are behind is “started saving for retirement too late.”
• “For the average household, that’s almost a half-million dollars.” This ties in nicely with what Wes Moss says…
• “a significant number of households have no retirement savings at all, including 13% of those age 60+ and not yet retired.” Yikes!!!!!

And to add to what the book says, check out this study. One of their key findings:

Four in 10 say “It’s going to take a miracle” to retire securely.

That sounds about right.

Overall, a lot of Americans are way behind on retirement savings and may not be able to retire when they want or at the level they want.

What does this mean for you? Not much other than to be a warning not to let it happen to you. Follow the ESI principles and you should be fine.

If you want more details on how to pay for retirement, I have a free email series called Creating a Great Retirement you can sign up for.

Living for Today and Not Saving for Tomorrow

Now we get into a bit more of the “why” Americans aren’t going to have the retirements they want — and it’s not a shocker.

The book’s summary:

In our studies, Americans have told us they think they should be saving 15-20% of their income annually, and they know they should max out all tax-protected accounts such as 401(k)s. But that’s not what’s happening. The average annual savings rate (all savings, not just toward retirement) in the United States has risen a bit since the recession – largely due to the millennial generation’s saving activity – but is still only around 7%.

While roughly two-thirds of private sector workers in the United States have access to an employer-sponsored retirement plan, only 13% of participants contribute the maximum amount allowed (currently $19,500). Incredibly, 26% of those eligible for plans do not contribute to them at all. These accounts also suffer what is weirdly called “leakage,” when people tap into them (and bear the tax and penalty consequences), before reaching age 59 ½. Three in ten have taken a loan or early withdrawal, the latter common when people change jobs and fail to roll over their funds.

Two words: train wreck.

So they know what they should be doing and yet they aren’t doing it.

And as a result, many are way, way behind.

They don’t save enough, some not even participating in what are generally good plans, and even those who do then hurt themselves by borrowing from what they save.

Ugh.

Getting Retirement Advice

Next the book tackles the issue of where Americans turn for their retirement advice:

Americans are near unanimous (92%) in saying that personal finances are a private matter, and nearly half of retirees say they don’t discuss retirement savings, investments, or finances even with close family or friends. Many people are more comfortable talking about their end of life than about their finances.

Retirees have told us repeatedly that they don’t know who or what is a reliable source of advice on managing their assets for and in retirement. Less than 40% work with financial advisors. More than 40% say they have no dependable sources of advice at all. And what sources do they trust? Most trusted are financial professionals, family, and friends. Least trusted are social media, the internet, and news media generally. In between are employers, financial institutions, and the financial news media.

More than a third of American adults (36%) say that financial decisions are the ones they second-guess the most (in second place at 18% is decisions about job and career). People may lack confidence in their financial decisions, yet they want to project financial confidence in front of family and friends. Sixty percent agree that, “It’s important that others think I’m in control of my finances.”

My thoughts:

• “Americans are near unanimous (92%) in saying that personal finances are a private matter, and nearly half of retirees say they don’t discuss retirement savings, investments, or finances even with close family or friends.” Almost everyone in the Millionaire Money Mentors forums says they have no one (or maybe one or two people) who they can talk to about money. That’s why they’ve joined the forums — to talk anonymously about various aspects of their finances and get feedback from a group who has been successful with their money.
• Let me also say that people better get comfortable talking to someone about money. They aren’t doing a stellar job of managing it on their own.
• “Retirees have told us repeatedly that they don’t know who or what is a reliable source of advice on managing their assets for and in retirement.” This is a valid point. Who can you trust? My answer is you can trust yourself. This is why both ESI Money (to educate people) and the Millionaire Money Mentors (to give feedback on money issues) exist — to help people learn about money management and do it themselves. Otherwise you are rolling the dice on whether or not the person helping you is trustworthy.
• “Less than 40% work with financial advisors.” I’m wondering what percentage of people who work with financial advisors are working with trustworthy people.
• “More than 40% say they have no dependable sources of advice at all.” Again, this is why I have the sites I have — so people can become their own dependable sources.
• “Most trusted are financial professionals, family, and friends.” Here’s the rub. Financial professionals may have the knowledge (or they may not), but are they trustworthy? Maybe, maybe not. Your family and friends are probably trustworthy, but do the have the knowledge? Odds (based on what the average American knows and how they manage their money) would say they do not. So here’s where we stand: few people actually have both the knowledge to give advice and are trustworthy, making finding a good financial advisor a real challenge.
• “Least trusted are social media, the internet, and news media generally.” There’s a good reason these are not trusted — they often give out terrible advice.
• “In between are employers, financial institutions, and the financial news media.” Honestly, I wouldn’t trust any of these either. They all have built in biases and/or a lack of knowledge. This is why you MUST become your own advisor IMO. You know you can trust yourself — just gain the proper knowledge and you’re set.
• “More than a third of American adults (36%) say that financial decisions are the ones they second-guess the most.” Uh, no kidding. They don’t know what they are doing, so no wonder they second-guess themselves. Knowledge of how to handle money would go a long way to making this problem go away. Oh, and many of the ones who don’t second-guess themselves are probably so clueless that they don’t know enough to know they should second-guess themselves.
• “People may lack confidence in their financial decisions, yet they want to project financial confidence in front of family and friends.” There’s a big difference between projecting false confidence and being confident because you know what you’re talking about. In fact, I don’t need to project confidence to anyone anyway. I know I know what I’m talking about and don’t need to broadcast it to others to feel better about myself. In fact, the less people think I know, the better IMO. Stealth wealth is the way to go.

Course Corrections in Retirement

The book begins to wrap up this section with the following:

Well prepared or not, people retire and adjust to living on a new mix of spending habits and income sources. But most have three things in common. First, they worry about finances, starting with the potential expenses of health problems. Other commonly cited concerns are rising costs, lack of money to do the things they want to do, and outliving their wealth.

Second, their objective is peace of mind, not wealth in itself. Given the choice, 88% say that they would like to save enough to have financial peace of mind, only 12% that they would like to accumulate as much wealth as possible. What constitutes financial peace of mind? For the majority (57%), it’s simply being able to live comfortably within one’s means. For many, it includes freedom to enjoy one’s lifestyle, or confidence that unexpected expenses can be handled. What can disrupt financial peace of mind? Most commonly cited are health disruptions (87%), large unexpected expenses (84%), and loved ones needing financial support (57%).

Third, retirees are resilient and adaptable, willing to make lifestyle adjustments and course corrections (the less painful the better) during retirement in order to maintain their financial footing and enjoy this new stage of their lives. The most basic involve adjusting finances, working more, and spending less.

I have said it before and I’ll say it again: margin of safety is a vital part of having a financially sound retirement.

The more of margins you have available to you and the more impact each has, the better.

With them, you don’t need to worry and you will have more than enough to cover most issues.

Without them, you are left to the whims of life, which is generally not kind.

Of course there are things that are so unexpected and massive that almost no one can cover them. But for the vast majority of people and conditions, having a wide variety of margins of safety will cover most expenses.

This is why I am wary of Lean FIRE — retiring with just barely enough to meet your living expenses. Because things will go wrong and when they do, these people won’t have many options.

As I commented in the Millionaire Money Mentors forums on a discussion about this topic:

Here’s what I imagine when I think of Lean Fire:

Let’s end today with the book’s survey results of the top financial worries in retirement:

• Costly health issues – 49%
• Rising cost of living – 46%
• Not enough money to do what I like – 44%
• Outliving my retirement savings – 40%
• Living on a fixed income – 37%
• Increasing tax rates – 25%
• Not being able to find work, if needed – 21%
• Stock market yields low return – 16%

Most of these can be severely curtailed if not outright eliminated by two things:

• Having a financial plan for retirement
• Having several margins of safety as part of that plan

But as we’ve seen in covering this book, most Americans don’t have the knowledge to put together a financial plan for retirement, most don’t have anyone to trust who could do so for them, and most don’t have margins of safety built in (in fact, most don’t even know what margins of safety are) as they don’t even have enough to cover basic retirement costs.

My suggestion for anyone reading this is to educate yourself on money management, begin creating a plan for retirement (both the financial and life sides of retirement), and then work to apply the plan to create the retirement you want.

That’s it for this time. To read the next post in this series, see What Retirees Want, More on Affording Retirement.