Running Out of Money Is the Greatest Retirement Fear. How to Avoid It With Two Retirement Experts

CONSUELO MACK: This week on WEALTHTRACK, addressing the

fear

of your savings drying up in

retirement

. Christine Benz of Morningstar and Fredrik Axsater of Wells Fargo provide insight and solutions, below in Consuelo Mack WEALTHTRACK. Hello and welcome to this edition of WEALTHTRACK, I'm Consuelo Mack. How concerned is she about having enough

money

in

retirement

? What if you really run out of

money

? In an annual Wells Fargo retirement survey of people ages 21 to 72, 7 in 10 workers said they were worried about

running

out of money, 69% don't know what they would do if they ran out of money, 38% of workers says so.

It would be a financial hardship to live beyond age 85, but 42% hope to be able to do so. Among the generations, Generation X, those born between 1961 and 1981, exhibited high stress. With at least a decade left in their careers, 55% describe themselves as having difficulty or suffering in their financial life. And less than half say they are saving enough for retirement. What about the much younger Millennials, roughly defined as those born between 1981 and 1996? Sixty percent say they are struggling or suffering financially, although they have much more time to make up the difference. A common theme among all of these generations: 92% feel more secure about retirement if they have access to a 401(k), and across all generations they feel significantly more secure, have less stress, and have more savings if they have a plan. clear financial. what Wells Fargo calls the “planning mindset.” No matter your age, the biggest

fear

is

running

out of money, especially if you live longer than expected.

We have two retirement

experts

with us to provide insight and solutions to these concerns. Christine Benz is the Director of Personal Finance at Morningstar and has been a guest on WEALTHTRACK since the beginning. During her 25-year career at Morningstar, she has helped millions of investors through her columns and books navigate some of the biggest challenges that can make or break a financial plan. Fredrik Axsater is executive vice president and head of strategic business segments at Wells Fargo Asset Management. His responsibilities include defined contribution and ESG: environmental, social and governance investing. He has dedicated much of his career to working with companies to improve the financial plans and financial health of their employees by increasing participation and results in 401(k) plans.

To what extent is the widespread fear of running out of money after age 85 justified? That's where we start our discussion. FREDRIK AXSATER: It's a realistic fear and, as you say, about 70 percent of people say this is our biggest fear: running out of money in retirement from a financial point of view. Thirty-eight percent say that if they live past 85, it would represent financial hardship. So those are really those hypothetical scenarios that I was referring to that are so important that we try to address. CONSUELO MACK: Christine, you're actually advising individual clients. Is living past 85 a very real concern, and should it be?

CHRISTINE BENZ: Well, it absolutely should be. Longevity has plateaued a bit in the US in terms of increases in longevity, but if you are part of a married couple, there is about a one in three chance that one of you will live to be 95 years old. As you embark on retirement at the traditional age 65, that's a 30-year time horizon you need to plan for, and you need your portfolio to remain sustainable over that time horizon. CONSUELO MACK: So let's talk about some of the solutions to this. Let's say you're lucky enough and you've also planned well enough to be fine until you're 85.

So what do you do, Fredrik, if you live past 85? FREDRIK AXSATER: One of the things that comes up in this research is longevity insurance, so we talked about the key risks we face in retirement from a financial point of view. You may think that there is a risk of sequencing. There is market risk. There is a risk of inflation. Longevity risk is the most important risk. So if you can buy insurance to receive a monthly paycheck if you live over 85, well, we're addressing the most important issue. CONSUELO MACK: Christine, so what do you recommend in terms of longevity insurance, for example?

What solutions do you recommend to your Morningstar readers and audience? CHRISTINE BENZ: Well, it's still not a very liquid market. I think financial advisors and planners have a lot of interest in this area and we are starting to see new products online. The good news is that, let's say you buy a typical longevity insurance product, you don't start paying until later in your life, so it's pretty affordable. That's the good thing about these. CONSUELO MACK: So should I do it early in other words? CHRISTINE BENZ: I think sixty-five, or whenever you're ready to get serious about retiring, I think is a reasonable time to consider a product like this.

Of course, you want to test the insurer's resources because you may have another 20 years before you start receiving revenue from the product, so you want to make sure the insurer is viable. CONSUELO MACK: How much is enough? What do you pay or how much do you pay for what type of coverage? FREDRIK AXSATER: So in our research we found that if you save about a seventh of your savings at age 65, which I think is a great age, as Christine mentions, then you should expect that when you reach age 85 you'll get about a 30 percent return on your savings. that money.

That's even today, with interest rates still very low... CONSUELO MACK: Interest rates are still pretty low. FREDRIK AXSATER: ...and so on. So, to your point, it becomes very competitive in price, very attractive simply because the first payment is later. It's insurance. It is insurance against something that will hopefully be very good: that we live longer. CONSUELO MACK: The objections that people have from an investment standpoint are, well, what happens if I don't live past 85? So I'm going to lose that investment, or it's money that I could be investing now for the next 15 or 20 years. How do you overcome that objection?

CHRISTINE BENZ: Academic research certainly points to there being a sort of visceral negative reaction to permanently parting with money and perhaps never taking advantage of it. I guess the counterargument is that we all pay for homeowners insurance and don't necessarily need it. I hope we never need it, and I think it's helpful to adopt a similar mindset around longevity protection. CONSUELO MACK: What are some other solutions, Christine, if you are lucky enough to make it to age 85 and live beyond 85? CHRISTINE BENZ: Well, one of the most obvious is that if you're receiving Social Security, if you can delay your benefit even a couple of years or until age 70, you can extend your benefit quite significantly.

So it's a very important thing to consider because of course it's a lifetime benefit, and it's also valuable for spouses where maybe they have a younger spouse and an older spouse. If the higher-earning spouse can maximize their benefit by delaying a little, that can be really powerful in terms of longevity protection. Another idea is to simply make sure that the portfolio, the investment portfolio, has adequate growth potential, because if you're locked into overly safe securities, cash, and bonds, you have a realistic chance of not earning more than inflation, let alone to grow. that wallet So, in my opinion, even retirees need a healthy exposure to equities.

CONSUELO MACK: That's something, rather than getting too conservative. I'm sure it's a real danger. CHRISTINE BENZ: Absolutely. CONSUELO MACK: Retirement is fraught with all kinds of uncertainties, and one of the uncertainties, Fredrik, that I know worries you is that when you think you're going to retire and when you plan to retire you don't. necessarily what is going to happen. FREDRIK AXSATER: Nowadays, people retire on average around the age of 63, but what's interesting (and this comes out very clearly in our research) is that when we ask retirees, they say it's eight times more common than ending up retiring. . earlier than they expected versus later than they expected.

So I think things just happen to us and we end up retiring a little early, and we need to have a system that's robust enough to help us prepare for those events. CONSUELO MACK: That's interesting. You discovered that too and when you said, "things happen," it's not because they say, "Oh, I want to retire earlier." It's because they lose their job or there's a health problem or whatever. So Christine, what's the solution to planning this? How do you plan that? CHRISTINE BENZ: I think you have to plan for some flexibility around that retirement age. Give yourself some wiggle room so that working until age 68 or 70 isn't your only backup plan.

I think individual investors and their advisors need to give themselves some flexibility. Another important point is – and you mentioned it, Fredrik – the idea of ​​sequencing risk, this idea of ​​retiring and finding really bad market returns. Well, if you can potentially give yourself some flexibility to delay retirement or at least reduce your expenses if that bad market environment materializes, that's another great thing you can do to help save your plan. CONSUELO MACK: Anyway, I know a bucket approach. Tell us about that, how that can prevent you from withdrawing money in a down market, for example. CHRISTINE BENZ: I think it's just an intuitive framework for thinking about how you would structure your portfolio as you embark on retirement.

So the basic idea is to have a cash deposit that maybe represents one or two years of portfolio withdrawals. You're battening down the hatches with that money because you don't want to risk jeopardizing your standard of living, and then you just go a little bit off the risk spectrum from there. So maybe for the next eight years of retirement, you have high-quality, short- to medium-term bonds or bond funds. Then you have stocks, and the idea is that in the worst-case scenario, where you run into a terrible stock market environment right at the beginning of your retirement, you have enough safe things that you could spend if necessary.

CONSUELO MACK: There are also generational divides, Fredrik, as your research showed. So, 58 percent of Boomers say they are saving enough for retirement, compared to 48 percent of Generation X. Members of Generation X are now in their 40s and 50s. So you still have time, but why do you feel so stressed? FREDRIK AXSATER: In many ways, Generation X, we sometimes talk about them as the sandwich generation. They were caught between two major systems. The Boomers had a pension plan, a defined benefit plan. Millennials have been automatically enrolled in defined contribution plans like the 401(k). CONSUELO MACK: Are Gen Xers stuck in the middle?

FREDRIK AXSATER: Exactly. I mean, they started saving six years later, on average, compared to the millennial generation. More than half of them are still paying off their student loans. More than half of them say they are not saving enough. More than a quarter of them also save for their children's education. Basically, everything that emerged in our research pointed to Generation X being a little more vulnerable. CONSUELO MACK: Also, they went through the financial crisis during some key revenue-generating years. FREDRIK AXSATER: Yes. In fact, they say they are the ones who felt they bear the biggest scars from the financial crisis.

That was another question we specifically asked. CONSUELO MACK: So what's the solution for Generation X? FREDRIK AXSATER: I think we must act now. This is the time. There is urgency. First of all, I would say that in general and across the board we want more and more people to adopt what we call the planning mindset, and this is a combination of having a longer-term financial goal, a shorter-term financial goal and also that they are taking action, and it is particularly important with generation easier to start participating in a retirement plan, again particularly important for Generation X and also particularly important for women.

CONSUELO MACK: So this planning mindset, and that's another thing that this research shows, and I'm sure, Christine, that you've also found that people who plan, first of all, feel better. They feel more financially secure and, in fact, they are. They save more. So for Generation X, do you have any specific advice? CHRISTINE BENZ: Well, I think the empty nest years can be a really powerful time toboost retirement savings. Financial planner Michael Kitces did what I thought was really useful research into those empty nest years, and he found that for people who had paid for their children's college expenses and eliminated that costly issue, if they had another good ten years of work and big savings, which could actually make up for being in a hole.

CONSUELO MACK: Oh, interesting. CHRISTINE BENZ: So those years can be very profitable to offset a deficit that existed before. CONSUELO MACK: So saving more than you had when you probably saved very little, that's the secret. I mean, if you have a ten-year period or whatever, that can make a big difference. CHRISTINE BENZ: Right, and after age 50 you're also eligible to make some of those catch-up contributions, and those can start to give you more critical mass as well. CONSUELO MACK: In their 401(k), in their IRAs. CHRISTINE BENZ: And also a health savings account, after age 55. CONSUELO MACK: Gotcha.

So Fredrik, Millennials. Of course, I look at Millennials and say, “Oh, you're all so young,” but they're stressed, too. I mean, I was surprised that 60 percent described themselves as struggling or suffering in their financial life. So how worried should they be? FREDRIK AXSATER: In many ways, the millennial generation is doing a little better, especially compared to generation American workers do not have access to a retirement plan. . So when we ask them, they rightly feel that they are in trouble or in a vulnerable state. Therefore, I think we need to make it easier for people of different generations to adopt a planning mindset.

For Millennials, I think it's about automatically enrolling them in savings plans in the workplace, making sure everyone has access across the board. CONSUELO MACK: So for that 40 percent who aren't offered an employer-based savings plan, what do you do? FREDRIK AXSATER: What you can do is set up an IRA. You can save taxes on your own, but again it is more cumbersome. It's very easy with a defined contribution plan. This happens automatically with your paycheck, and we should encourage people to introduce more simplicity to help them have the retirement they want and deserve. CHRISTINE BENZ: I think any of those nudges can be very powerful, so automatic enrollment, automatic re-enrollment.

If someone doesn't accept it, automatically sign them up for the next season. So I also think it's a great development and maybe one of the reasons Millennials are in better shape is simply the adoption of target date funds as a great all-in-one solution for people who have no idea what They are doing. There are a lot of people on the road who essentially haven't taken any driving classes, so target date products, while not perfect, I think do a very good job of addressing the fact that people go into 401(k) plans without knowing necessarily where to start.

I think the decumulation stage is the point that really needs some work... FREDRIK AXSATER: I agree. CHRISTINE BENZ: ...in the system. That's what's not working for participants right now. CONSUELO MACK: I know that worries you a lot. CHRISTINE BENZ: Yes. CONSUELO MACK: What concerns you about the decumulation phase and also, again, what can people do to make it work more effectively for them? CHRISTINE BENZ: I think potentially incorporating some sort of longevity feature into 401(k) plans would be a big step forward. People view their 401(k) balances as a kind of abstraction. So let's say you have a million dollars and my thought is, well, I hope you like living on $40,000 a year, because that's a sustainable withdrawal rate from a million-dollar portfolio initially.

Therefore, people need help understanding what a reasonable withdrawal rate is. What is a reasonable structure for my portfolio during retirement? As much as I like all-in-one accumulator funds, target date funds, my view is that many of the retirement income funds on the market really aren't ready for prime time in terms of being solutions. all in one for retired investors. So, I would like to see more work done there in the asset management space. In the meantime, I think investors can maybe think about a bit of a bucket strategy in terms of structuring their portfolios. Keep components of cash, bonds and stocks discrete, and use them to help inform where they go for cash on an ongoing basis.

CONSUELO MACK: We're in an unusual period where we've had a bull market for nine years. So people who look at their retirement accounts say, "Wow, I've done very well and the stock market has been very good to me." At some point the market will correct substantially. He always does. What is your advice in that situation regarding our expectations? Are expectations too optimistic right now after nine years of bull market? FREDRIK AXSATER: I think so, and we're also seeing this kind of year after year in our survey. For example, we ask ourselves, "Are you saving enough for retirement?" Which in recent years, more and more people are saying yes, but we don't really see evidence that people are saving more. (Laughter) I think people are becoming more and more optimistic, and I think the communication continues and also people are looking for rules of thumb and some guidance on what a normal return is.

What is the normal reduction rate you mention, Christine? We can provide that to investors. CONSUELO MACK: Excessive optimism on the part of potential retirees, Christine? CHRISTINE BENZ: I think so. That's concerning because I talk to a lot of people who are in their 50s and thinking about retiring. So I think over the next decade my personal view is that market returns are likely to be fairly muted. So, if you maybe have some kind of weak stock market at the beginning of your retirement, that can deal a catastrophic blow to your plan if you spend too much of the plan during those years.

So I think there are real risks for people who retire young and are not realistic about the potential that maybe the market won't be as useful over the next decade. FREDRIK AXSATER: We ran some numbers on this and said that for a woman who retires at 65 and you withdraw five percent a year, using some reasonable capital market assumption, standard mortality table, then you have a risk of 30 percent of running out of money. CONSUELO MACK: Wow. FREDRIK AXSATER: It's for greater longevity. CONSUELO MACK: Do I mean 85 years or earlier? FREDRIK AXSATER: It's usually around 85. CONSUELO MACK: Eighty-five.

Good. FREDRIK AXSATER: But just answering the question of what the opportunity is. CONSUELO MACK: Thirty percent chance. FREDRIK AXSATER: To Christine's point, if you don't get market returns in the first five years, that number goes from 30 to 50 percent. Therefore, having market returns early in retirement (back in sequencing) is really important. CONSUELO MACK: So if you don't have them, you have to plan for it. CHRISTINE BENZ: Right, and I also acknowledge the research we have on sustainable withdrawal rates from portfolios. People retiring at age 50 could follow the four percent guideline, which you may have heard is a sustainable retirement rate.

Well, it's important that you understand the assumptions behind that four percent guideline. It is based on a time horizon of 25 to 30 years. If you retire at age 50, you may have a longer time horizon, in which case you should take an initial withdrawal rate of less than four percent. CONSUELO MACK: An investment for a long-term diversified portfolio, Fredrik. What should we all own in a diversified long-term portfolio? FREDRIK AXSATER: Last time I was here I said target date funds and I still say target date funds. I would say in this case talk to your advisor. Talk to your employer to make sure these target-date funds also help you wind down in retirement.

CONSUELO MACK: Are there target-date funds that do that, that help you in the decumulation phase? FREDRIK AXSATER: I agree with Christine that I think there is a lot more to do. I don't think those solutions have really been worked out yet, and I think it's a call to action for the industry. CHRISTINE BENZ: When I think about must-have investing for investors at all stages of life, I just think about a good, simple stock fund, whether it's an index product or an ETF or some kind of core fund, very low cost. actively managed fund. I think that's something someone should pursue throughout their life, even into retirement, because they need the growth potential that comes with equity exposure.

CONSUELO MACK: So, a basic, low-cost capital fund. CHRISTINE BENZ: Very low cost. CONSUELO MACK: Would it be global or national enough? CHRISTINE BENZ: I think a globally diversified portfolio makes a lot of sense, and the good thing is that you can buy hedged products that take foreign currency fluctuations out of the mix, and costs are really coming down on those products. That's why I like the idea of ​​a globally diversified stock portfolio. CONSUELO MACK: To follow you wherever you go. (Laughs) Whatever the stage of life. Christine Benz, thank you very much for coming from Chicago… CHRISTINE BENZ: Thank you, Consuelo.

CONSUELO MACK: ...from Morningstar and Fredrik Axsater, nice to see you from Wells Fargo Asset Management. Thank you. FREDRIK AXSATER: Thank you very much. Before we share our action item with you, we want to alert you to an exclusive WEALTHTRACK podcast we're doing with an up-and-coming next-gen portfolio manager. Bill Miller IV has worked with his famous father for several years. We'll talk to him exclusively on WEALTHTRACK.com about his specialty, compounding power of generating income and capital appreciation. He is on our website WEALTHTRACK.com. At the end of each WEALTHTRACK we try to give you a suggestion to help you build and protect your long-term wealth.

This week's action point is: Train your brain to save! There was a fascinating article recently in the Wall Street Journal about a Cornell University study showing that “our brains may be programmed to look for opportunities to make money, but they don't recognize opportunities to save, even when they're right in front of us.” . .” The study found that “every time we work, we practice making money. “We don’t practice saving that often.” As one of the study's co-authors told the Journal, "Imagine there's a saving muscle in the brain that doesn't get used much; we can exercise it a lot more." As many other studies have shown, using as many automatic programs as possible to save is the most effective strategy in the long term.

The article also recommends starting a simple daily routine of putting a dollar a day into a savings account as a good initial exercise in getting into a savings pattern and mindset. Piggy banks to give to someone? Next week on WEALTHTRACK: The state of the economy and markets with Strategas' Don Rissmiller and Nicholas Bohnsack, members of Wall Street's top-ranked macroeconomic research team. In this week's exclusive EXTRA article on our website, Fredrik Axsater analyzes a positive trend. More and more companies are focusing on the financial well-being of their employees. That's encouraging. For those of you active on social media, continue to connect with us on Facebook and Twitter.

Thanks for watching. Have a great weekend and make next week profitable and productive.