Retirement savings growing again
Over the past two years, professionals in Greater Miami have begun to start saving for retirement earlier and more thoroughly than before. For some, the prospect of dwindling retirement funds can be frightening, but for financial planners, the push to be smarter savers only means a boom in business.
The reaction to increased longevity and continued mobility well past age 65 has unfortunately left retirees with more time to spend the same amount of savings.
Over the past couple years, that drop in lifestyle quality and savings has become all the more harsh.
The wakeup call to save smarter came in 2007 and 2008, though it’s taken until the past two years for people to start actively saving, said Harold Evensky, president of Evensky & Katz Wealth Management.
“It’s the majority that is unprepared. There are a lot of people either in denial or unaware that it’s going to be a tough time,” Mr. Evensky said. “The good news is you’re going to live longer and be healthier; the bad news is you’re going to live longer and be healthier.”
As of 2012, nearly 15% of Miami-Dade’s population is 65 or older, according to the US Census Bureau. On a national level, the National Institute on Aging estimates that the number of Americans 65 and over is going to undergo significant growth, ballooning from 40 million in 2010 to 72 million in 2030. With a growing older population, the importance of planning for retirement is only further emphasized.
“There is a very small percentage of people that can truly retire at all,” said Fred Kettler, founder of Kettler Financial Services. “Most people just haven’t saved or planned efficiently or effectively.”
Typically, the groups that do better when it comes to saving are the professional market or employees who started saving early with a company-sponsored 401(k).
“If you’re talking about the professional market and the business owner market, they’ve done a better job planning. It’s a small percentage that I see that are going to be close to maintaining a [pre-retirement] lifestyle,” Mr. Kettler said.
The retirement cliff occurs when someone stops working and the downgrade in income becomes apparent. A discord between what returns on investments are after retirement – typically 4%, Mr. Evensky said – and what income was before can be surprising. Being able to get only a $40,000 annual return from $1 million in savings can be frustrating for any client.
“There is and there will continue to be a major shock when people realize how much they need to maintain their lifestyle,” Mr. Evensky said.
The shock results from two factors. “It’s a combination. It’s a fact that people simply underestimate mortality and they overestimate the kinds of returns they’re going to get long term in the market,” he said.
The demographic groups that tend to be shocked about their remaining resources after retirement are those that have been too conservative in their retirement contributions while they were still earning, said Jack Christian, an investment specialist for J.P. Morgan Private Bank, Miami.
“We encourage our more conservative clients who may have not taken as much risk in their retirement accounts to save at a higher rate than those who may have a more growth-oriented retirement portfolio,” Mr. Christian said. Adjusting spending after retirement is also essential when rising healthcare costs are taken into account, Mr. Christian said.
“Determining a realistic spending level in retirement based on pre-retirement spending and saving behavior can guide. In general, your savings rate should be north of 20%… but for those looking to increase spending in retirement, this may be higher,” Mr. Christian said.
The move to save more is being pushed along by increasing awareness on the part of both clients and the media, Mr. Evensky said. “Clearly, one of the realities is that people are going to have to work a lot longer than they may have planned on,” he said.
The assets Evensky & Katz manage currently are just under $1 billion, whereas it was about half of that or less before clients began to ramp up retirement savings a couple years ago, Mr. Evensky said. At the very least, he said, the retirement cliff is good news for the wealth management profession. “More people need it and we are becoming more valuable.”
The alternative to being a better saver may be to work more, Mr. Christian said. “We also find ourselves advising many of our clients to consider working additional years.”