- 5-Minute Article
- Dec 12, 2017
Update Your Financial Plan for Today’s Changing World
Why planning must evolve in the new retirement landscape.
Retirement looks quite different than it did a generation ago. People are living longer,1 but fewer have company pensions to provide guaranteed lifetime income.2
In this quickly changing landscape, people should revisit their financial plans regularly to help ensure they remain on track to meet retirement goals. Here are four factors could inspire updates to a retirement plan:
Chances are you’ll live longer than your grandparents or parents.3 With advances in medicine and healthcare, 25% of today’s 65-year-olds will see age 90, and 10% will live past age 95.4
Longer life expectancies mean more time to enjoy retirement. But they also mean people must ensure they have enough savings to cover basic expenses like housing, food, and transportation — as well as unanticipated costs, such as medical expenses or home repairs — during those years.
For each year of retirement, experts suggest planning to have about 70% to 85% of pre-retirement annual income to cover retirement expenses.5 Another strategy is to consider the “salary multiplier” rule of thumb, which uses multiples of an annual salary to create savings targets for different ages. For example, people age 45 might want retirement savings that are worth four times their annual salaries. By the time they reach age 60, their target for total amount saved would be eight times their annual salary.
How Much Should Be In Your Retirement Savings To Have A Comfortable Retirement
People saving for retirement today typically have fewer sources of guaranteed retirement income than previous generations. For example, only 24% of employers offer traditional pension plans.6 That leaves many retirees reliant on a mix of guaranteed income sources, such as Social Security benefits, and variable income sources, such as investments in retirement accounts.
Sources Of Retirement Income
Individuals can examine their potential future income sources to determine if they are comfortable with the balance between guaranteed and variable payments. In some cases, people may decide they want additional sources of guaranteed income.
Annuities — which may turn a portion of your savings into guaranteed payments and can include options that provide lifetime income — are one potential addition. Annuities also may allow savings to grow on a tax-deferred basis. To learn more about these potential benefits and important considerations, read “5 Questions to Ask Yourself About Annuities.”
The stock market is subject to fluctuations that can impact individuals who rely on income from investments in an IRA, 401(k), or other accounts during retirement. While some retirement experts suggest taking 3–4% from savings each year to help a nest egg last,7 this strategy only works if savings continue to grow, keeping pace with inflation and rising costs so you don’t lose ground. Market downturns can make this challenging.
Stocks may provide the most growth potential in the long term, but they can also deliver unpredictable performance over shorter time periods.
Stock Market Fluctuations Over The Years
This short-term market volatility exposes people to sequence-of-returns risk, where the timing of market downturns can have a significant impact on how long retirement savings last. If market downturns occur early in retirement, and someone withdraws money from savings, the overall value of that portfolio can take longer to recover and result in less money available later on than if market downturns occur later in retirement.
The Impact Of Sequence-Of-Returns Risk
Hypothetical example. For illustrative purposes only.
To help address potential variation in the income available from investments, a retirement financial plan should consider ways to reduce exposure to potential downturns or increase options for guaranteed income.
Medical costs have been rising faster than inflation, increasing at a rate of about 6% annually in recent years. Non-recurring medical costs, like surgery or long-term care, also tend to increase with age. Because of these trends, a retirement plan might need adjustments to help ensure enough coverage for medical expenses.
Annual Increase In Medical Costs
One option is to include permanent life insurance as part of a retirement plan. Permanent life insurance not only provides a death benefit to protect families, it can also provide an additional source of income. That’s because a portion of the premiums paid into a permanent life insurance policy grows through tax-deferred interest credits, market returns, or dividends — building cash value that the policy owner can access through withdrawals or loans to pay for costs such as medical expenses. Some permanent life insurance policies include optional riders specifically designed to cover costs related to long-term care needs or chronic illnesses.
With these factors in mind, individuals and their financial advisors can review an existing retirement plan and identify potential updates that can help meet needs such as protection against longevity risk and volatile markets, greater income certainty, and coverage for medical expenses. This process can help build confidence that a plan is well-adapted to the changing retirement landscape.
Related Partner Education:
Learn more about how retirement is evolving in The New Retirement Landscape, developed in partnership with Dow Jones Solutions for Barron’s.