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Following an extended bout with inflation – one that’s significantly eroded purchasing power – it’s not surprising that income remains a primary concern for retirees and those nearing retirement.
Undoubtedly, retirement income is a challenge, but knowing that issue is top of mind for many clients brings clarity for advisors. That clarity emphasizes the need not only for advisors themselves, but also for getting on the retirement savings ball as soon as possible. Delays foster regret and those regrets cause avoidable stress.
Obviously, Social Security is a significant component of the retirement income equation for many Americans and it pays to get that right. Literally. As noted in the Schroders 2024 U.S. Retirement Survey, it’s also clear that clients need help from advisors when it comes to Social Security, particularly when to claim it and dispelling of related myths.
“The most popular ages non-retirees plan to file for Social Security benefits are ages 65 (23%) and 62 (12%),” according to the survey. “Forty-three percent plan to take Social Security before age 67 – the full retirement age for everyone born in 1960 or later, and just 1 in 10 plan to wait until at least age 70 – the age at which an individual reaches their maximum monthly benefit.”
What makes the above data points discouraging while further highlighting the need for clients to work with advisors on Social Security is that 74% of those polled by Schroders know that they’ll get higher benefits the longer they wait. Still, close to 40% think they need the money now or are concerned the system will imminently collapse.
Looking at Some ‘Magic’ Retirement Numbers
There was a time when $1 million was viewed as the gold standard for retirement assets, but due to inflation and high interest rates, that number has increased. Depending on the survey, what clients think they need for a “good” retirement is now significantly higher than $1 million.
Advisors know that there are other factors at play and clients often get a number in their heads because that’s what they hear in the news or from friends and colleagues. The reality is many folks can have solid retirements with less than $1 million, but the emphasis should be on monthly income expectations and needs, not a large round number.
“According to the research, 88% of non-retired Americans are at least slightly concerned about not knowing how to best generate income during retirement,” adds Schroders. “Asked to forecast how much monthly income will be required to live comfortably, non-retirees said $4,947 on average, which is higher than the $4,258 of monthly income today’s retirees report they are generating.”
Let’s just call that $5,000 a month, meaning $60,000 annually. That’s ambitious, but not unreasonable. Think about $5,000 a month this way: a lot of clients can knock out 40% or more of that tally by simply waiting until they’re 70 to claim Social Security.
Smoothing the Accumulation to Decumulation Transition
Exiting full-time employment to retirement or mostly retired is a transition from accumulation to decumulation and with that in mind, advisors need to be on top of clients various retirement plans and accounts.
The Schroders survey notes that beyond Social Security, Americans view their top five retirement income sources as cash, employer-sponsored retirement plans, their spouse’s employer-sponsored retirement plans, investment accounts and the spouse’s pension. Cash holdings must be addressed because if they’re too high, that could hinder the ability of the retiree’s portfolio to generate adequate income. Point is the accumulation to decumulation transition doesn’t need to be scary and advisors can make significantly less so for their clients.
“The transition from retirement savings accumulation to the decumulation phase is not an easy one to make,” said Deb Boyden, Head of US Defined Contribution, Schroders. “With working Americans increasingly looking to their employers for answers, plan sponsors and assets managers have an opportunity to work together to develop solutions that create a stronger bridge between the asset accumulation and decumulation phases to grow and preserve plan participant wealth while simultaneously providing an opportunity to optimize the timing of their Social Security benefits.”