Relying on only one or two sources of retirement income may be the experience of current retirees but those who are still planning their retirement expect a wider spread.
A new report from Hearts & Wallets, based on its Investor Quantitative Database, reveals that while 28% of current retirees have four or more sources of income while 48% of future retirees that expect four plus.
Among the anticipated income sources is work, which the report says is at odds with reality. The firm’s 14 years of data tracking shows that just 1 in 5 retired households have employment as part of their retirement income mix. Those who are relying on work as an income source are likely overestimating the role it will play, assuming they are able to work.
The report also considers real estate and the importance of advisors including this in retirement planning conversations. The survey found that eight in ten advice experiences do not address real estate despite 79% of 65+ households owing their homes with no or low mortgage and rising values. Hearts & Wallets estimates that almost half of households age 65-plus have at least as much net
equity in real estate as investable assets, but housing is also their largest expense.
Tapping retirement savings for essentials or fulfillment is another area where advisors can add value.
“Tapping into capital elicits the strongest emotional reaction from consumers of any qualitative topic Hearts & Wallets has examined,” explained Amber Katris, Hearts & Wallets subject matter expert. “The financial services industry can do more to empower consumers who want or need to take these one-time funding chunks, which can often be at odds with annuitization.”
The report, Getting Real About Retirement: Breaking Through with Better Solutions for ‘Chunk or Nothing’ Spending, Work & Real Estate, also covers retirement surprises, with 84% of retiree households experiencing different realities to their expectations including:
There was no significant difference in these surprises between those households that were professionally advised and those that were not.
Hearts & Wallets research also shows that advising income replacement at rates around 80% is prevalent but may overstate what is required. Its database analysis shows that incidences of being “forced to live more frugally than expected” is flat until retirement income replacement rates fall below 50% of less. It suggests that the worst controllable surprises can be avoided with a 3 to 5 times assets-to-income ratio.
“Saving one or two million dollars for retirement is an unattainable goal for most Americans,” said
Laura Varas, Hearts & Wallets CEO and founder, said. “The most important goal is avoiding poverty
as an older adult. In addition to income replacement, financial advice should help consumers to
consider retirement surprises, work capacity, living situations and ‘chunk-or-nothing’ spending. A
high priority should be on inspiring saving, so the 70.5 million households of all ages with less than
$50,000 in assets have a minimum safety net as they age. Firms that can understand, size and build
for these consumer behaviors will carve out niche products and advice experiences in the large and
growing U.S. retirement market.”
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