By: Tahir Jaffri, Financial Advisor

Retirement represents the largest financial decision of many people’s lives. A sound plan for retirement focuses on a variety of factors, including budgeting and cash flow, investment planning, and risk management. This focuses on some of the more significant risks people may face in retirement and provides potential product options that can help people protect what they’ve earned and ensure it last.

In the past, an individual’s retirement income would typically be funded by Social Security, defined benefit pension plans, and personal savings. These three key sources have traditionally been known as the “3-legged stool” of retirement. In today’s environment and moving forward, the retirement nest egg will be largely reliant on personal savings.

The number of employer-sponsored defined contribution (DC) plans and individual retirement accounts (IRAs) that rely on the employee to save a portion of their salary – such as 401(k)s, 403(b)s, SEP-IRAs, and SIMPLE IRAs – have steadily increased over time. The concern is that only 67% of private sector employers offer some form of retirement plan and only 52% of employees have access to DC plans.

There has been a general decrease in the overall savings rate in the U.S. over the past 40 years. According to the Federal Reserve, the average savings rate has dropped from 11.2% in 1980 to the 2005 low of 2.9%. While this rate plateaued around 6-7% beginning in 2014, followed by a noticeable spike in 2019-2020 during the COVID-19 pandemic, the long-term trend shows Americans are saving less at a time when they should be saving more for their retirement.

Secure Retirement Institute reports that the average DC/IRA plan balance for Americans participating in retirement plans is slightly more than $250,000. The average retirement asset balances for the pre-retiree and young retiree age brackets reflect an average between $346,600 and $441,600 for these age groups. Investors may feel this balance may be sufficient to provide retirement income for their entire lifetime. However, that may not be the case in some instances.

Historically, the 4% amount has been used to determine how much a retiree could expect to withdraw from their portfolio while maintaining a sufficient account balance to last the rest of their life. Using this guideline, a 4% withdrawal from a $400,000 portfolio means a retiree could receive $16,000 annually for 25 years without considering portfolio growth or market volatility. The problem arises when factoring in the potential impact of economic inflation, long-term care needs to be coupled with the rising cost of health care, and longevity.

Planning for and protecting against these risks may mean pre-retirees will need significantly more retirement savings than current averages reflect. As mentioned earlier, Americans are generally saving less at a time when the retirement savings responsibility has clearly shifted from the employer to the employee. This disconnect could become problematic in the future. The concern pre-retirees and retirees have about possibly running out of money emphasizes the importance of considering guaranteed lifetime income as a part of an overall retirement income strategy. Retirement strategies providing an income floor that lasts a retiree’s lifetime will likely become more important going forward. Brighthouse Financial offers this as a part of their overall retirement income strategy.