7 minute read
Preparing for retirement is a journey filled with both excitement and anxiety.
While envisioning the freedom and opportunities of post-career life is thrilling, many clients also experience stress and anxiety about their financial preparedness for this next chapter.
And some data highlighting this does look bleak.
So, let’s look at some of the issues and how a financial advisor could try and bring things back into equilibrium (hopefully less worrying and more enjoyment) and a unique program we at Dunham have created to potentially help you with this arduous task.
What A Financial Advisor Can Help With
Now, prudent financial planning extends beyond assessing wealth at a single point in time.
Instead, it should revolve around securing a reliable source of income throughout retirement years.
Misunderstanding this fundamental principle exposes retirees to significant and enduring risks.
This is why sequence risk - the risk that taking money out of a retirement account at the wrong time could hurt how much money the investor ends up with overall - is so important and why we have written so much on it (you can read it here).
Put simply, account withdrawals during a bear market are more costly than those in a bull market.
Why? Because – for example - if Person A’s portfolio is down in year one or two of retirement (suffering negative returns) while they’re also withdrawing, let’s say 4%, for living expenses, they would essentially be selling as prices declined – magnifying the loss to the portfolio.
· DunhamDC – our proprietary and unemotional algorithm - aims to mitigate sequence risk, address emotional biases in investing decisions, and potentially accelerate investment recovery after bear markets.
A retirement professional can assist in transitioning from wealth accumulation to using assets. They offer guidance on key decisions – such as Social Security and Medicare - and craft an income strategy that seeks to maneuver around future uncertainties.
They also can keep a client in the loop on their income and expense patterns and changes they will need to make to hit certain goals.
And this is why utilizing the Dunham Retirement Income Program – a comprehensive retirement and seamless approach to retirement planning – may be just what you need.
*Best of all, Dunham does not charge our financial advisors or their clients for this comprehensive retirement income tool, or additional fees for the cutting-edge overlay in DunhamDC.
As a financial advisor, this is the delicate balance between letting your client enjoy this new chapter in life (retirement) while also planning to have enough money to endure as long as possible without hiccups.
But it appears things may be growing unbalanced as individuals begin worrying more about their retirement – leaving less time for them to savor it.
*There are no additional fees and expenses to use DunhamDC other than the fees and expenses applicable in the Custom Asset Allocation Program.
Households Are Growing Pessimistic About Their Retirement Savings
There has been a significant change in how Americans view retirement since the pandemic.
For instance - according to recent U.S. Federal Reserve data1 - there’s been a sharp deterioration in the share of working Americans who say their savings will be sufficient when they retire – dropping from 40% in 2021 to just 31% as of 2022.
Now, it’s important to keep in mind that 2022 – from which this data was collected - saw stocks and bonds sell off amid inflation and the Fed raised interesting rates.
For example2, in 2022 -
· The S&P 500 fell 19.4%
· The Russell 2000 fell 21.6%
· The Nasdaq Composite fell 33.1%
· The Vanguard Extended Duration Treasury ETF plunged 39.20%
Meanwhile, inflation was roaring at multi-decade highs3.
These two things may have affected the survey data as households were feeling the stress of sinking investments and rising costs, which influenced their retirement calculations.
Thus, the surging equity markets over the last year may reverse this trend.
Another more structural issue for retirees is that, despite minimal changes in life expectancy, their projected retirement costs surged by 50% over the past four years – from $0.95 million to $1.46 million.
What this means is that the average person now perceives the need for roughly $1.5 million to retire comfortably, a stark contrast to the $88,400 typically saved, per the Northwestern Mutual study.
· That’s a 1700% (17x) difference between what the average person saved compared to what they perceive they’ll need. . .
This widening gap, up by 16% from last year, underscores the mounting challenges as the US over-65 population grows, and individuals confront the task of funding lengthier retirements amidst potential Social Security cuts.
· According to a 2022 Transamerica survey4 of U.S. workers, 37% of respondents cited the potential reduction or elimination of Social Security benefits as a primary retirement concern.
Making matters more interesting is that a recent analysis from 2023 suggests that America's “retirement crisis” could incur a staggering $1.3 trillion in costs for federal and state governments by 2040.
For perspective - according to a report by the Pew Charitable Trusts5 - insufficient retirement savings will likely lead to increased public assistance expenses, reduced tax revenues, lower household spending, and a decline in living standards. This anticipated financial burden, estimated at $964 billion for the federal government and $334 billion for states between 2021 and 2040, underscores the demographic trend (aka more retirees and fewer births) playing a significant role in driving this shortfall.
· Because of this, the number of households and individuals aged 65 or older with annual incomes below $75,000 - indicating potential financial vulnerability – is expected to surge by 43% to 33 million by 2040.
This surge in perceived retirement needs - courtesy of inflation - is happening at a time when the median household is meaningfully underfunded by 94% and is growing increasingly worried about social safety nets – such as Social Security and Medicare.
Now, while these systems will likely be patched over and around, it’s important to take power into the retiree's own hands and prepare.
And that’s where a financial advisor comes in.
Click here or call us at (858) 964 – 0500 to see how the Dunham Retirement Income Program can potentially help in planning client retirements.
Also please feel free to visit our Dunham Insights page for more information on the Dunham Retirement Income Program and our brochure highlighting its key benefits and features.
Sources:
2. https://www.fool.com/investing/2022/12/30/just-how-badly-did-stock-markets-perform-in-2022/
3. https://tradingeconomics.com/united-states/inflation-cpi
4. https://www.kiplinger.com/retirement/if-social-security-gets-cut-what-will-you-do
Disclosure:
This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation, or as a substitute for legal or tax counsel. Any investment products or services named herein are for illustrative purposes only, and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance.
Information contained in the materials is believed to be from reliable sources, but no representations or guarantees are made as to the accuracy of completeness of information.
Past performance may not be indicative of future results. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.
All examples are hypothetical and for illustrative purposes only. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues. The solution for an investor depends on their and their family’s unique circumstances and objectives.
DunhamDC (“DunhamDC”) is a proprietary algorithm of Dunham that seeks to mitigate sequence risk, which poses a threat to an investor's returns due to the timing of withdrawals. The algorithm employs what Dunham considers to be a pragmatic strategy, generally making incremental increases to the equity allocation when global stock market prices decrease and decreasing it when global stock prices increase. This approach is objective, unemotional, and systematic. Rebalancing is initiated based on the investment criteria set forth in the investors application and is further influenced by the DunhamDC algorithm.
Due to the large deviation in equity to fixed income ratio at any given time, investor participating in DunhamDC understands that a large deviation in equity to fixed income ratio can have significant implications for the risk and return profile of the account.
DunhamDC is NOT A GUARANTEE against market loss or declines in the value of the account or a timing strategy. Investor may lose money.
The Dunham Retirement Income Program (DRIP) involves investments subject to risks, fees, and expenses. There is no guarantee that any investing strategy will be profitable or provide protection from loss. Asset allocation models are subject to general market risk and risks related to economic conditions. Past performance may not be indicative of future results. There may be economic times where all investments are unfavorable and depreciate in value. Loss of original capital may occur.
DRIP is not an insurance product and is not guaranteed. Clients may loose money.
Dunham makes no representation that the program or strategy will meet its intended objective. Market conditions and factors that influence investment outcomes are subject to change, and no program can fully account for all variables and events. The program requires making investment decisions based on factors and conditions that are beyond the Account Owner’s and Dunham’s control.
Dunham & Associates Investment Counsel, Inc. is a Registered Investment Adviser and Broker/Dealer. Member FINRA / SIPC. Advisory services and securities offered through Dunham & Associates Investment Counsel, Inc.