It’s no secret that the state of retirement preparation in the United States is terrible. According to a study by TransAmerica Center for Retirement Studies, the median retirement account balance for baby boomers is $152,000, for Gen X it’s $66,000 and for millennials it’s $23,000. Furthermore, according to the Center for Financial Services Innovation, 42% of Americans don't contribute to a retirement plan at all.
The reasons for this woeful state of financial preparedness vary based on where you are located. Various parts of the country have different financial struggles. Some challenges may be due to poor education, lack of opportunity or a low income. From where I am situated in NYC (which is an extreme concentration of wealth, education and power), many of my clients fall into the category I refer to as HENRYs (High Earner Not Rich Yet). Frequently, they are also behind in their savings, but for very different reasons. The problem for many HENRYs is “investor inertia.”
“Investor inertia” is a well-documented phenomenon in which investors get comfortable doing nothing due to being overwhelmed by too many choices, paperwork, fear of making a poor decision or just being too comfortable with the status quo. This behavior has caused many people to struggle in their retirement years, despite high incomes and successful careers.
One solution for investors to overcome this inertia challenge is “nudges,” which have been put into place through corporate retirement plans. “Nudging” is a concept in behavioral economics popularized by Nobel Prize winner Richard Thaler, and is a method to influence investors to overcome certain heuristics. Many plan sponsors implement “nudges” to get people to start investing sooner and to increase their savings rate automatically. This may include automatically enrolling new employees into the company 401k plan, as well as increasing an employee’s savings rate every year. In both situations, you have to opt out of these features instead of vice versa, which is a very good thing.
Unfortunately, many soon to be retirees didn’t have a “nudge” when they first entered the workforce, and some are stuck doing nothing (or not much) to plan for their financial future. These individuals are now in their 50s and 60s, but have only a fraction of what they will need for retirement.
Regardless of your clients’ current circumstances, the best decision they can make is to start planning now! There are ways of making up for lost time if the clients are willing to take action. Some suggestions advisors can make to grease the wheels of progress include:
- Increase your savings rate: How much your clients choose to save is one of the few things investors have control over. The more they save, the bigger their future nest egg.
- Invest more aggressively: Deciding to allocate your portfolio more heavily toward equities can potentially increase returns over time. The problem is as investors get older, they have less time to make up for losses if the stock market experiences a downturn. However, if your clients are significantly behind on their retirement savings, this is a very practical solution to get them where they need to be—as long as they can stomach the volatility.
- Setting up “nudges:” Investors don’t need access to a corporate retirement plan to set up “nudges” to help them to save for retirement. Utilizing automatic debits from a checking account into an investment account is a great way to save without any effort. Furthermore, having that money invested in a well-diversified portfolio allows the investor to invest in the market without worrying about whether or not it’s a good time to add money.
- Eliminate unnecessary expenses: Any individual that goes through their monthly expenses line by line will find things that they can cut. This is worth doing every few months to make sure you aren’t wasting money on unnecessary products or services. Signing up for various subscription services, going out to eat several times a week and leasing a luxury car are all examples of easy things to cut in your clients’ expenses to increase their cash flow. These savings can go toward investments.
- Plan to work longer: The days of working until your early 60s, buying a gold watch, collecting Social Security and then dying a few years later are over. For many Americans, retirement may last several decades. Working a few extra years is not a bad idea.
- Plan to work part time: Retirement doesn’t need to mean that you spend your days walking on the beach, playing golf or sailing (like many financial brochures will lead you to believe). If your client enjoys her career, working a few days a week (or several hours a day) is a great way to earn extra money to supplement Social Security and portfolio income. It’s also a great way to stay engaged as you age.
- A previously unemployed spouse should start working: This may not be ideal for a spouse who hasn’t been in the workforce for years. However, if your clients need to make up for lost time, having both spouses generating income is a good option and worth exploring.
- Downsize: If your clients are empty nesters, this is a no-brainer. Why continue paying many thousands of dollars a year in property taxes, maintenance cost, insurance and upkeep of a large home. Simplify your life, save money and plug that extra savings from downsizing into investments.
- Relocate: If your clients live in a big city, or the suburb of one, there is a good chance that their expenses are high relative to other parts of the country. If your clients want their hard-earned dollars to go farther, they should consider relocating. There may also be additional tax benefits depending where they decide to go (e.g., Florida). This decision alone can make financing retirement far more attainable.