The Retirement Crisis That Isn’t

You may have heard that there’s a huge retirement crisis in America. They say people aren’t saving nearly enough, they’ll have to rely only on Social Security, and retirees are doomed to run out of money. Even Bankrate tells us that 21% of working Americans aren’t saving anything at all!

Sounds pretty scary, doesn’t it?

But when we ignore the financial articles, and all the scary headlines, and we simply look at the data, a very different story emerges in nearly every area of retirement savings. In fact, a Gallup poll taken last year showed that about 80% of retirees reported having enough money to live comfortably.

Here’s something else: EBRI tracked changes in non-housing assets during the first two decades of retirement for people with different levels of assets. They found that those who retired with $200,000 or less, after 19 to 20 years, still had about 75% of their savings still intact (right around $150,000). And those who retired with more than $500,000 had only spent about 12% of their savings over that same time period.

How is that possible, especially if you believe that many people aren’t saving anything at all?

The answer to that question seems to tell us why there’s no widespread retirement crisis. The EBRI study says that the reason people aren’t depleting their portfolios is because they tend to spend their income instead of their savings.

What kind of income are we talking about? Things like Social Security, pensions (if they have them), annuity payments, maybe income from part-time work – that’s the money they’re living on. Just like they did during their working years, they spend what they make and only dip into savings when it’s absolutely necessary.

This explains why retirees are not depleting their savings. In fact, while some retirees do spend down their assets in the first eighteen years following retirement, about one-third of all sampled retirees had actually increased their assets over that time period.

Okay, so what happens if they don’t have enough income in retirement to live the way they did during their working years? It turns out that retirees just wind up tightening their belts and living on what income they do have.

What this reveals is something I’ve been saying for many years: guaranteed income in retirement, or income that’s at least reasonably stable, may be the key driver that determines how well you’ll live once you decide to hang it all up. Whether the guarantees come from the U.S. government in the form of Social Security, the PBGC with a pension, the claims-paying ability of an insurance company if you purchase an annuity, or the FDIC at your local bank, the more guaranteed income you can create for yourself, the more you may feel you can spend, and the less you may need to rely on your savings and investments.

The Bucket Strategy™ is built around this very concept: it’s designed to provide a stable cash flow from non-volatile asset classes, while giving the more volatile portion of your portfolio the time it needs to potentially grow, and ultimately refill the income portion.

Using a strategy that allows for a stable income that isn’t affected by the fluctuations of the stock market is crucial to the potential survival of your assets. Imagine a retirement where your only source of cash flow is the money you withdraw from your savings, and you’re watching that bank balance dwindle down. Unless you’re abundantly wealthy, that’s a pretty scary proposition; and it’s why we do what we do.

As for the so-called retirement crisis, I wouldn’t call it a crisis at all. If you employ a strategy that aims to cover your essential spending needs with guaranteed or reasonably stable cash flow, you just may find that retirement is everything you thought it would be.

Need help with your Buckets? We do this every single day at Lucia Capital Group. How can we help you the most? Just give us a call.