Recently we’ve had some retirement sessions with our 401k provider to discuss their services and planning for retirement. A few people have asked my views on it, so this post is about my thoughts on the presentation since I’m better at writing than talking.
One of the first things discussed in the presentation is that retirement age is not something that set by the government; you can retire at any age that you choose. What is set by the government are the ages that you can withdraw from certain accounts. Even though the rest of the presentation focused on discussing retiring in your 60s or later, this was a refreshing thing to hear off the bat.
The presentation also discussed how starting early can have a major effect on your retirement numbers, similar to my post on Why You Should be Saving for Retirement Right Now! Risk tolerance was also a focus and the presentation showed how much of your salary you would need to save based on average returns for different stock/bond/cash allocations. Attendees were also encouraged to up contributions by 1% to make gradual changes over time, which can be a good strategy to save more without feeling it in your budget. The presentation touched on the 4% rule for withdrawing retirement savings, which is a good rule of thumb for planning.
All of the variations shown in the presentation indicate that retirement is different for everyone. You have to assess your situation (homeownership, children, income, spending, etc.) to plan for retirement. Your retirement number is not the same as your coworker’s number. Your risk tolerance may not be able to handle your friend’s investment strategy. There is no master plan for retirement, except for the one that you create for yourself.
The presentation focused a lot on salary. All multiples and percentages were of your current/future salary. Since your salary is a moving target, it’s difficult to know how much you’ll be making when you’re 35/40/50 year old. You can estimate using averages for your industry, but it’s still quite up in the air. What the presentation should have focused on is your annual spending; this is something that you have complete control over. If you’re making $60k a year and only spending $40k a year, $40k a more accurate number to base your retirement projections on. Instead of focusing on replacing 80% of your pre-retirement income, focus on replacing 100% of your anticipated retirement spending (and maybe include a buffer). The general guideline is that you need to save 25x your annual spending to withdraw 4% of your investments per year without ever touching your principal. So if you want to spend $40k per year in retirement, your number is $1M. If you want to spend $100k a year in retirement, your number is $2.5M. It’s that simple.
Fees were conveniently left out of the presentation, but a couple of attendees (myself included) asked about them. The good news here is that our plan has the institutional version of most funds, which have the lowest expense ratios. However, the fees to the plan administrator are about .5-.75% a year. While not terrible, this was not discussed upfront and is an important part of retirement planning. Often the tax benefits outweigh plans with high fees, but make sure you’re aware of the fees you are paying for participating in a 401k to assess if it is the right savings vehicle for you.
Near the end of the presentation, the speaker talked about annuities and glossed over the potentially negative aspects on the slide. While I don’t know much about annuities, I have not heard very good things in the personal finance community. Essentially, you are surrendering all money to the insurance company who provides a guaranteed payout each year until you die. Annuities are notorious for their high fees, restricted access to the funds, and often cannot be passed on to heirs. So if this is an option you’re considering, please do additional research.
Expecting 55% of your retirement to come from Social Security seems excessive. If you’re close to traditional retirement age and are able to get a good estimate of your benefits, this can be helpful. However, if you’re young and/or planning on retiring early, estimating Social Security benefits can be difficult. Though I do believe Social Security will be around by the time I am 67 (in some form or another), I think it’s best not to plan around it and see it as a bonus if/when it starts paying out.
Overall, I’m glad my organization is having these meetings. I suspect the increased interest in retirement education is due to the highly compensated employee test, but it’s still a positive to encourage younger employees to start saving. Lastly, these are just my personal thoughts on the presentation, consult with a financial advisor if you are unsure about your planning.
Does your company give retirement education presentations? Do you feel that they are helpful?