Even the wealthy have serious concerns about their ability to retire comfortably.
Data on U.S. investors with at least $1 million in investable assets from a survey conducted by Boston-based Natixis Investment Managers suggests that wealthier individuals are quite preoccupied with their eventual ability to retire comfortably, even with $1 million or more in assets.
Of course, 2022 is proving a difficult year for those thinking about retirement, as Americans have suffered steep losses in their 401ks and other retirement vehicles so far this year. This has called into question underlying assumptions about saving, spending and investing.
Even before the turmoil of this year, high net worth individuals (HNWIs) were concerned about their ability to retire securely, the Natixis survey found. A million dollars just doesn’t go as far as it used to. More than a third (35%) of millionaires believe “it will take a miracle” to achieve a secure retirement, while almost half (42%) of HNWIs are so worried about retirement security that they avoid thinking about it all together.
Even though they plan on retiring at the relatively early age of 63, almost six in 10 (58%) HNWI say they accept the fact that they may have to work longer than they plan. Yet it may not be that easy—44% worry they won’t be able to.
Macro-level concerns
Coupled with inflation concerns are rising interest rates, which pose a problem for retirees and savers alike.
“A decade of historically low rates impeded investors’ ability to annuitize assets, leaving many retirees with a less-than-ideal income. It’s true that the overall level is still low from a historical perspective, but rates are now rising on higher government debt. Together with persistent fears of a global recession, we’re seeing new risks emerge,” said Liana Magner, Executive Vice President and Head of Retirement and Institutional in the U.S. “Those hoping to retire need a new playbook, including education, planning, tools, and policy to meet the retirement crisis.”
Magner also notes that although the impact of inflation and low rates could soften, one thing impacting those living in retirement are rising healthcare costs. The overwhelming majority of those surveyed (65%) acknowledge that healthcare costs and long-term care costs like nursing care will have a big impact on financial security in retirement.
Facing the problem
The standard rule for retirement drawdowns has long called for the withdrawal of 4% of assets as income in the first year of retirement and then 4% plus the rate of inflation each year for future withdrawals. Using this rule, one million dollars may not be the comfortable cushion many might expect, especially as inflation continues to grow.
“Many people are surprised when they do the math and realize that 4% of $1 million is only $40,000 yearly. This is usually quite a bit less than these individuals are likely used to living on annually.”
Dave Goodsell
“A million may seem like a lot, but many people are surprised when they do the math and realize that 4% of $1 million is only $40,000 yearly,” said Dave Goodsell, Executive Director of the Natixis IM Center for Investor Insight. “This is usually quite a bit less than these individuals are likely used to living on annually. This underscores why it’s so important to work out all the assumptions and do the math early when making plans—and why professional advice is necessary.”
The 60/40 rule, another long-standing investment principle, denotes a portfolio of 60% stocks and 40% bonds. However, this ratio doesn’t account for heightened and emerging risks to the equity portion or a low-rate environment, which is bad for bonds. Even as rates go up, it will still take time for them to reach a comfortable level for generating a consistent income for retirees.
In the meantime, more than half (58%) of high-net-worth respondents recognize that low rates will make it difficult to generate an income off their savings. Investors would likely do better to diversify their holdings, in consultation with a trusted financial advisor.
The “three-legged stool” of retirement funding (Social Security, Employers, Individuals) may also require a shift. Amidst concerns about the long-term viability of Social Security and rising public debt, 31% of respondents believe it will be difficult to make ends meet without Social Security.
The full report, “The million dollar question: How much do I need to retire?” can be found here:https://www.im.natixis.com/us/research/2022-millionaire-report.
SEE ALSO:
• $1 Million for Retirement? It’s Not Enough
• Wrong Way: United States Drops in Retirement Security
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.