A Simple Formula for Retirement with Dignity

Ron Surz

4 hours ago

Retiring with dignity can be complicated, but it doesn’t have to be. Here’s a simple formula:

Save enough, and
Don’t lose it, especially in the Retirement Risk Zone spanning the 5 years before and after retirement

Save enough

Recent surveys report that people near retirement say they will need $760,000 to retire comfortably, yet the average savings are far less than that at $568,000, and the median is even lower at $189,000.

We have a “Retirement Crisis” where people are not saving much. Most retirees deal with the shortfall by living frugally. They don’t “retire comfortably” but they do retire because that’s how life works.

The important word here is “enough.” As we approach retirement, we make plans to spend a certain amount that will stretch our savings over a lifetime. We set a lifestyle that we can afford. “Enough” is whatever our lifetime savings can support. Because that’s all there is, it has to be “enough.” Of course, building those savings matters a lot, until you get to retirement, when there’s nothing you can do to change it—it is what it is.

The point is that sooner or later we all stop getting paychecks and begin spending down our savings for the rest of life. Some of that spending will come from Social Security checks that will help. “Enough” is whatever we can afford.

But “enough” can change dramatically in the Retirement Risk Zone. Investment performance in the Risk Zone is critical to our lifestyle in retirement. That’s why the second part of the formula for Retirement with Dignity is to protect lifetime savings because in retirement an investment loss cannot be made up from paychecks. When it’s gone, it’s gone.

Don’t lose it

Once a retirement spending plan is in place, we see the rest of life in that framework. We’re ready. Negative disruptions (investment losses) emotionally and financially cripple the plan. It hurts a lot because lifestyles suffer, and the threat of outliving savings escalates. That’s why we need to protect lifetime savings. The pain of suffering losses is far greater than the joy of earning a higher return. Reductions in lifestyle hurt more than the joy of adding luxuries.

But more than 65% of retirement savers in defined contribution savings plans do not control their risk. They leave that decision to their employers, most of whom choose an off-the-shelf, set-it-and-forget-it target date fund (TDF) that is 85% risky for those near retirement, with 50% in equities and 35% in risky long-term bonds. That’s the mix that lost more than 30% in 2008.

TDFs are the most popular Qualified Default Investment Alternative (QDIA). Some say that participants in TDFs simply don’t care about their risk, but surveys say they do care—a lot. They want to be protected as they approach retirement and incorrectly believe that they are protected. The good news recently is that there hasn’t been much risk over the past 17 years, the longest bull market. Here is an inflation-adjusted (real) returns histogram that shows the years when returns were earned in the indicated ranges. For example, real returns were between zero and 10% in 2015 and 2016.

But that will change. Nothing lasts forever. Please see our short video on this risk.

75 million Baby Boomers are currently in the Retirement Risk Zone, and tens of millions of them are in TDFs. They will be shocked when the stock market crashes, and then they’ll be mad because they’ll feel deceived since they thought they were safe, but they weren’t.

Someone should tell them. That’s what I’m doing here.

The aftermath

Unlike 2008, this time there will be an outcry for serious reform. In 2008 Baby Boomers were not in the Risk Zone and there was only $200 billion in TDFs. Now Boomers are in the Risk Zone and there’s more than $4 trillion in TDFs. Baby Boomers are a formidable force to be reckoned with. Their $85 trillion is more than half the wealth in the US.

Money talks and so do votes. Boomers didn’t care that much in 2008. They do care now, and so do their heirs.

Stay tuned. My “Revenge of the Baby Boomers” article attracted 90,000 readers on Seeking Alpha. People care.