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When it comes to retirement planning, “hope for the
best, plan for the worst” is a reasonable motto.
Given that many retirees fear running out of money
more than they fear death, it’s only prudent for
them to manage their retirement plans with a healthy
appreciation for all that could go wrong.
However, I think there’s a risk—albeit an underdis-
cussed one—that well-meaning retirees and retire-
ment-savers can take caution too far. For example, I’ve
run into
75
-year-old retirees who, in the interest of
playing it safe, are spending just
2%
of their portfolios
annually; at that pace, they’re very likely to leave a
very large kitty behind. That may be what they want,
but it may not be. In a similar vein, I’ve met
40
-year-
old accumulators who tell me that they’re certain
Social Security won’t be there for them, or that they’re
assuming their portfolios will return just
2%
in their
25
-year runway to retirement.
Of course, I realize that it seems ridiculous to discuss
being too conservative about retirement planning
in an era in which the median
401
(k) balance, per
Vanguard’s
How America Saves
report, was just
shy of
$30
,
000
in
2015
. But there’s also a segment of
the population that could be playing it too safe with
their retirement-planning assumptions, and those too-
conservative assumptions carry costs. Accumulators
who are too conservative in their retirement-planning
assumptions might short-shrift other pre-retirement
goals because they’re trying to swing a gargantuan
savings rate, while overly parsimonious retirees might
fail to enjoy the fruits of their labors or simply worry
about running out of money more than they need to.
“One risk everyone talks about is failing—going broke
when you’re older—but another risk that’s rarely
talked about is the risk of having some big pot of
money when you die,” said David Blanchett, head
of retirement research for Morningstar Investment
Management. “While this isn’t a risk in a traditional
sense, it means you haven’t best utilized your money
to fund retirement and consumption.”
Here are some of the key ways that retirement-savers
and accumulators run the risk of being overly conser-
vative in their retirement assumptions; these items are
common inputs in retirement savings calculators and
software programs.
1
|
Assuming Social Security won’t be there
“I do not incorporate Social Security benefits into my
retirement forecasts and future cash flow models. The
reason being is because we all know how irrespon-
sible Washington has been with the Social Security
fund. Plain and simple.” So commented a reader on
a recent Morningstar.com article about what sort of
assumptions younger investors should make about
their future Social Security benefits.
Considering that the Social Security Trust Fund is pro-
jected to run dry in
2034
, maintaining conservative
assumptions about Social Security benefits may seem
like an extremely prudent tack. But assuming that
retirees
40
years hence will get zip, nothing, nada from
Social Security is a pretty big stretch, given that
some fairly simple, albeit controversial, fixes—such
as means-testing, extending the full retirement age,
or raising the cap on income that’s subject to Social
Security tax—can put the program on firmer footing.
And even if a young accumulator is convinced he or
she won’t get anything from Social Security, that
assumption necessitates a heroic bump-up in saving
relative to the accumulator who assumes she’ll get
something. Using the Ballpark Estimate calculator and
assuming no help from Social Security, a
25
-year-old
earning
$40
,
000
a year and receiving a
3%
annual pay
increase would need to save nearly
25%
of her annual
income from now until retirement age to help supply
in-retirement cash flows equivalent to
80%
of her final
year’s working income. That’s a heavy lift, especially
for individuals with more modest salaries who must
steer a healthy portion of their paychecks to necessi-
ties. By contrast, the accumulator who assumes the
status quo for Social Security benefits would need to
save
6%
of her income annually to achieve the same
Being Too Conservative Is a Big Risk
for Retirees
Portfolio Matters
|
Christine Benz