The longer clients live, the less they’re spending in retirement — but that’s only because they often have to cut expenses, experts say. So how much should they save?
A combination of issues is to blame for prematurely depleting nest eggs. While many clients are willing to reduce the amount they spend in their golden years, experts say both a reliance on historical market data and longer life expectancies should inspire a reexamination of the traditional 10% savings rule.
David Blanchett, head of retirement research at Morningstar, says there’s a better solution for clients taking on the rising costs of health care later in life.
“If you would ask me what a good target is, I would say 15%,” Blanchett said, regarding how much clients should consider saving from their income for retirement. “It’s higher for high-income clients because they have to provide for their retirement benefit, since they get less from their Social Security.”
Wealthier clients also live longer, he noted in a presentation at the Morningstar Investment Conference in Chicago. According to data compiled by the investment research firm, 40% of wealthy Americans are expected to live to age 95, twice as many as those who earn an average income. With most clients earning above the average income, Blanchett said there’s even more of a reason for advisors to set realistic expectations for how much their clients will need later in life.
“It’s a different landscape today,” he said. “We’ve got individuals who are responsible for self-funding their retirement — whether it’s through 401(k) plans or IRAs — and that really complicates the planning process because you don’t know how long you’re going to live.”
He added, “Today, you’ve got low expected returns, and when you add on retirements lasting longer with lower expected market returns, it really increases the overall cost of return.”
Sheila Padden, founder of Padden Financial Planning in Chicago, said she too has run tests on client portfolios and agrees a target closer to 15% is more realistic to fully fund a client’s retirement.
“The traditional savings rate was 10%, but I’ve been testing that and it seems like it’s more like 15%,” Padden said at the conference.
One tip she has for planners with clients in need of curbing their spending habits is to set up a system that forces them to save with every paycheck.
“What I tell young clients is that the 15% savings is combined, employer and employee,” Padden said. “Pay yourself first. Money you never see is money you can never spend. And then, after that, consider Roth IRAs if you’re in the low income tax bracket.”
Jim Stork, principal at Pinnacle Financial Group, said the key issue is many clients plan for their spending to continue at a flat, inflationary rate. “In reality, many clients will see their spending decline assuming good health,” he said. “How do you factor all of that in and come up with appropriate recommendations for the asset mix and the spending levels?”
Rather than assume spending will increase, Stork said he assumes there’s a future spending reduction, and he creates models to show his clients the impact of various assumptions.
“I think the lesson is the rules of thumb are only the rules of thumb,” Stork said. “They work for the median client, but you need to be more nuanced in thinking about, ‘Is my client likely to live longer, does my client have more of their spending that’s discretionary, does my client have more of their income that’s guaranteed?’”
