Retirement Savings Crisis Getting Worse, Not Better by Gary D. Halbert
FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
December 8, 2015
IN THIS ISSUE:
- How Debt & Denial are Changing Retirement Lifestyles
- Three Investing Misconceptions Among Many Retirees
- How Much Do I Need to Save For a Secure Retirement?
- WEBINAR With YCG Investments Tomorrow 3:00PM Eastern Time
As long-time readers know, one of my continuing themes over the years has been saving, and in particular saving for retirement. Record numbers of Americans are retiring every year and, unfortunately, most have not saved nearly enough for the retirement lifestyle they envisioned.
Even worse, more and more Americans are retiring with debt – mortgages, car payments, credit cards, etc. It used to be that you planned not to retire until you were out of debt and with a comfortable nest egg. Not so anymore.
Today we will look at some recent retirement findings from the Transamerica Center for Retirement Studies which are very concerning. We will also look at a recent survey by the Teachers Insurance and Annuity Association – College Retirement Equity Fund, which researches retirement trends. The results are alarming.
And finally, we’ll look at the question of how much you need to save to have a comfortable retirement. Unfortunately, this is a complicated subject that depends on several variables such as how much you have saved already, at what age you plan to retire, the lifestyle you wish to have, etc., etc. It’s a very important topic, so let’s get started.
How Debt & Denial are Changing Retirement Lifestyles
Retiring comfortably has gotten a lot more complicated in recent decades, much of it due to our increasing longevity – a welcome development that is largely out of our control.
However, unwelcome developments that are within our control are increasingly contributing to the retirement challenge too, including heavy debt and what appears to be blissful denial of the costs of their “Golden Years” by many who are nearing retirement or already retired.
Let’s look at some facts and statistics about retirees in a recent report from the Transamerica Center for Retirement Studies (TCRS).
One in five retirees today has a mortgage that competes for limited resources for basic living expenses and healthcare costs, according to the report. A third (33%) of homeowners 65 and older had a mortgage in 2011, up from 22% in 2001, the Consumer Financial Protection Bureau recently reported (leave it to the government to report old data).
And these seniors’ mortgages were bigger: a median $79,000 in 2011, up from an inflation-adjusted $43,400 a decade earlier. The number of households headed by someone at least age 65 with a mortgage rose to 6.1 million from 3.8 million over the same decade, the Bureau found.
One in four retirees have high credit card balances, and paying them down should be a priority. These findings echo earlier research showing an alarming trend toward quitting work while still in debt, long held to be a retirement taboo.
Only 16% of retirees strongly believe that they built a sufficient nest egg. Total household savings in all retirement accounts among retirees at the time of their retirement was just $131,000 in 2011.
Almost nine in 10 say Social Security is a current source of retirement income, and 61% expect it will be their primary source of retirement income for the rest of their life.
They typically began taking Social Security at age 62, the earliest possible age – which is usually a big mistake. Only 1% waited until age 70, when they could collect the maximum monthly benefit.
Many retirees left work before they intended: 60% left unexpectedly, often due to being fired or laid off or dissatisfaction with their job, or for health or caregiver reasons. Only 16% retired early because they already had enough savings.
Some of the blame rests with the Great Recession, when those nearing retirement may have been compelled to use their home equity as a lifeline. But in the years before the crisis millions of homeowners used low interest rates to acquire bigger houses and second homes or refinanced and took cash out of their primary residence. A decade later, these decisions are coming home to roost.
Surprisingly, most retirees show few signs of regret, according to the latest survey. They typically expect to live to age 90. Seven in 10 say they are in good health and 94% say they are happy, TCRS found. Some 84% enjoy a strong sense of purpose. Maybe retirees are finding that they do not need as much money to be happy. But it’s also possible they are in deep denial.
That appears evident in the advice today’s retirees have for young workers, the TCRS survey found. Three in four retirees wish they had saved more on a consistent basis; 68% wish they had been more knowledgeable about investments; and almost half (48%) said they waited too long to get involved in their own financial security.
But are younger Americans listening? Probably not.
Three Investing Misconceptions Among Many Retirees
When investing we all make assumptions about the right criteria for choosing investments and the best way to manage risk. Unfortunately, many investors’ core notions about investing are often seriously flawed or flat-out wrong.
In this section, we will look at some recent findings from the Teachers Insurance and Annuity Association – College Retirement Equity Fund (TIAA-CREF) which regularly surveys investors. The TIAA-CREF is the leading retirement information provider for people who work in the academic, research, medical and cultural fields.
Here are three examples of misguided thinking identified in the latest TIAA-CREF survey that you should avoid if you want to invest effectively for retirement or any other financial goal.
Misconception #1: Short-term results are the best barometer of performance:
When researchers for the TIAA-CREF asked 1,000 investors what time period was most important for evaluating an investment, more than half (52%) chose quarterly or annual performance rather than spans of three, five or 10 years.
Nearly half (47%) of those polled also admitted that they had bought an investment based on how it fared over the previous year rather than over the long term.
That’s not surprising, I suppose, considering the inordinate amount of attention the financial media lavishes on short-term gyrations of the market, and the fact that in January of every year financial sites are full of lists highlighting the best- and worst-performing investments for the previous year.
But when you consider that in most cases you’ll be investing money you won’t tap for many years, if not decades, looking at performance over the last year alone can be disastrous. Yet that’s what many investors still do, according to the latest TIAA-CREF survey.
In the case of retirement accounts, choosing a stock, mutual fund or ETF on the basis of how it fared the last six or 12 months makes little sense. If nothing else, applying such a short-sighted yardstick could leave you with a portfolio skewed toward whatever investments happen to be most popular at the moment, which are most likely to be overpriced.
A better approach: Instead of focusing on any single time span, consider how an investment has performed versus its peers over the course of several market cycles that include both bull markets and bear markets.
It’s really not that hard to do. Simply plug in a fund’s or ETF’s name or ticker symbol into the Quote box at Morningstar.com and then click on the Performance tab. You will see the actual past performance over numerous periods of time, which we call “time windows.”
Misconception #2: Diversification eliminates investing risk:
Diversification is one of the most widely known investing concepts, but it’s often misunderstood. For example, when asked about the benefits of diversifying, 71% of those polled for the TIAA-CREF survey said they believed they could eliminate investment risk entirely by building a diversified portfolio. Wow!
That’s simply not the case. Pretty much any fund that owns stocks – including the most broadly diversified stock index funds – will go down when stock prices tank. Still, diversification can be a powerful tool for managing risk.
For example, by buying a fund that owns dozens or hundreds of stocks instead of investing in just a few shares of individual companies, you protect against “specific stock risk” – that is, the danger that your entire portfolio’s value will be decimated due to problems affecting only a particular company or industry.
And by spreading your money among several different asset classes – stocks, bonds, alternative investments and cash equivalents – you may be able to limit the damage your portfolio suffers in times of stress. During the last financial crisis, for example, while stocks got hammered, bonds continued to generate positive returns.
To build an effective portfolio you need to understand what diversification can and can’t do, and shed unrealistic expectations about the benefits that diversifying can offer. At Halbert Wealth Management, we diversify clients’ accounts with a mix of actively managed strategies.
Misconception #3: Taking more risk guarantees superior returns:
Most investors are aware that there is a link between risk and return. But many don’t fully understand how that relationship actually works. For example 53% of the people polled for the latest TIAA-CREF survey said they believed that higher risk guarantees bigger returns. You’ve got to be kidding!
That, of course, isn’t true. Some high-risk investments generate huge payoffs; some deliver average or mediocre returns; and some fizzle and result in losses, small or large. So focusing on investments with higher risks in no way assures that you’ll earn outsized returns. Depending on how skillful (or lucky) you are in choosing among higher-risk options, you may come out a winner, a loser or somewhere in between.
How Much Do I Need to Save For a Secure Retirement?
This is by far the most often-asked question to those of us in the financial industry. I wish I could give you a simple and accurate rule of thumb that could assure you’re saving enough to stay on track toward a secure retirement. But I can’t because there isn’t one.
The 10%-of-salary figure is often tossed around as a viable benchmark – and it might be if you started saving that amount in your early 20s and stuck to it faithfully over the next 40 years or so. But few of us actually adhere to that regimen. Most of us get a late start at saving that much or have years when we save less than 10% or we may even dip into our savings occasionally.
To allow for more leeway in building a nest egg, many pros suggest a higher target of 15%-of-salary, which is the figure cited in recent research by the Center for Retirement Research at Boston College.
But the reality is that no percentage or formula can cover all situations. There are just too many variables that affect how much you need to save, including how much you already have in savings; the retirement lifestyle you envision; how much of your pre-retirement income you’ll need to replace once you retire; and of course, the age at which you plan to retire. Other variables include: how you invest your savings prior to and during retirement and how long you expect to live.
And then you’ve got to throw in the major wild card of healthcare expenses, which depending on how much medical care you need later in life and how much the cost of such care rises, can have a major impact on the size of the nest egg you’ll need and thus how much you must save to build it. As you can see, it’s complicated and most investors need the help of a professional.
WEBINAR Featuring YCG Investments Tomorrow at 3:00PM Eastern Time
If you are concerned about the rising risks in the stock market, you should consider a strategy that manages for risk, such as YCG Investments. Our next live webinar will feature YCG’s two founders and principals, Brian Yacktman and Will Kruger. The webinar will be tomorrow Wednesday, December 9th at 3:00PM Eastern.
This is an opportunity for you to hear directly from Brian and Will about their Concentrated Composite Strategy and how they seek to achieve attractive risk-managed returns using their long-term “value-style” approach to stock selection. You will also be able to ask them your questions at the end of the presentation. CLICK HERE to register for this special event.
Very best regards,
Gary D. Halbert