This year's Wells Fargo Retirement Fitness Survey provides some interesting information concerning the "relatively affluent" from among the over-50 crowd and what they expect with respect to retirement. Among the findings are the following.
* While pre-retirees surveyed expect to need $800,000 for retirement, they have saved only $300,000 (median amounts).
* 67% say their expectations for retirement have changed in the past year, and 56% now expect to work longer by an average of three additional years.
* They expect to live nearly 21 years in retirement, but plan on spending nearly 10% of their savings every year in retirement.
* Nearly two-thirds lack any formal plans for retirement savings or spending strategies -- only 35% of the pre-retirees have a written plan for retirement, and of this group, only 52% say they updated it in the past year during the market downturn.
An expected 21 years in retirement is pretty well in line with average life expectancies for 65 year-olds (although, obviously, one should make plans based upon a significantly longer expectation in that the consequences of outliving one's money are so dire), but an expected spending rate of 10% of assets per year is simply nuts. At a 10% annual withdrawal rate a retiree would likely run out of money in about 10 years, and perhaps much sooner. The AARP Withdrawal calculator says a 10% withdrawal rate would eat through one's entire savings in 12 years (assuming a generous 6% annual return and a 3% annual inflation adjustment) -- and that doesn’t even take into account taxes owed on retirement income or the consequences of taking a portfolio hit early in retirement (the "sequence of returns" problem).
A 10% withdrawal rate is so foolishly optimistic that the planners at T. Rowe Price don’t even include it as a possibility in their retirement planning guides -- they don't go above 7%. And, even then, they estimate that there is barely a 50:50 chance one's money will last 20 years assuming a 7% withdrawal rate and a 60:40 mix of stocks and bonds. By using a more conservative portfolio 0f 40:60 stocks to bonds, the "success rate" probability falls from 52% to 44%.
Bottom line: Even with plausible expectations, the academic experts wisely counsel using income annuities with an inflation rider to make sure that retirees don't outlive their money. Those retirees with the nerve actually to try what they told the Wells Fargo surveyors they expect to try are in for a calamitous retirement. Producers have a difficult educational job ahead of them if retirees are going to avoid disaster in this area. But as hard as this job is, the opportunity is also great.