Retirement Investing Explained
Al Waller: Retirement is a time in life when people transition out of the workforce with more free time to enjoy life. But, when we do so, we are leaving our paychecks behind. We will need to live on income from Social Security, employer pensions and 401(k)s, and other savings and investments. For most people, this is far easier said than done.
Welcome back to ClearPath – Your Roadmap to Health & WealthSM. I’m your host, Al Waller. Joining me is Catherine Collinson, founding CEO and president of Transamerica Institute® and its Transamerica Center for Retirement Studies®. Together, we will discuss how to strategize for retirement.
Before we get started, I want to remind our listeners that we would love to hear from you and get to know what topics you’d like to hear about. Please drop us a line at [email protected].
Catherine, based on your team’s research, what are some ways that people can prepare themselves for retirement?
Catherine Collinson: Everyone needs a financial strategy for retirement – but very few workers have one. In this podcast episode, I would like to share findings and actionable insights from my team’s recent survey report Post-Pandemic Realities: The Retirement Outlook of Four Generations.
Our survey found that fewer than three in 10 workers (29%) have a financial strategy for retirement in the form of a written plan. Looking across generations, even fewer Generation X and Baby Boomer workers have a written plan – and they are the generations closest to retirement.
Al Waller: I’m not surprised. Over the years, I’ve known many people who thought it was a good idea to start planning, but they put it off for one reason or another – and when they finally did start planning, they wished they would have gotten started sooner.
Catherine Collinson: Procrastination is quite common. Our survey found that more than four in 10 workers (42%) said they would prefer not to think about retirement investing until they get closer to their retirement date. Similar to your observations, they are depriving themselves of opportunities. One of the fundamental principles of retirement investing is leveraging as long of a time horizon as possible, so that savings and investments can compound and grow. With that said, it is never too soon or too late to get started.
Al Waller: In my prior career as a Human Resources executive, my perception was that many workers started saving for retirement long before they engaged in planning. What are your thoughts on this?
Catherine Collinson: Our research corroborates your observation. It’s always great news when workers are saving. We found that two-thirds of Generation Z workers are already saving for retirement – and they started at age 19. However, they are not engaging in planning as of yet. When asked how much they need to save, many guessed the amount (45%).
Al Waller: The idea of financially planning may sound daunting for many – even worse than doing taxes, which is something most people dread. What is the all-important first step that people should take in devising a retirement strategy?
Catherine Collinson: Believe it or not, the most important first step has nothing to do with calculators or spreadsheets – that part will come later but not now. The most important first step requires reflecting, daydreaming, and asking yourself: When I stop working and have more time for myself, what will my life priorities be? How will I want to spend my time?
Of course, these are highly personal questions that only you can answer for yourself. The answers can be important motivators for saving and planning – because they have financial implications. For example, our survey finds that almost two-thirds of workers dream of travelling in retirement (64%), and travel costs money.
Your dream could be doing road trips across the US or going on cruises. Whatever your dream, there's going to be some sort of costs associated with it, and it's something that you're going to need to plan and save for.
Al Waller: This sounds like it may be easier for people who are closer to retirement than younger adults who are getting started in their careers and building their lives. What would you tell them?
Catherine Collinson: Speaking from my own personal experience, looking back on my twenties, I did not yet have a clear vision either. However, I knew it was important to save as much as I could, so I would have more options down the road when I’m ready to retire. I did know that I want to travel and see the world, and that desire still holds true today. If I want to turn this dream into reality, I need to save for it.
Even now, I still have unanswered questions about when, how, and where I want to retire – and how I want to spend my time in retirement. But I’ve learned enough about myself that I can include placeholder costs and expenses in my financial plans to help inform my goals, priorities, and budget.
Al Waller: In my own experience, I really got serious about planning when my wife and I had children because it wasn't long after that we were preparing for my sons to enter school, and in our case, it involved tuition payments. It struck me that in order to be able to manage, we would really have to double down on our savings preparations if we were to have any realization of a comfortable retirement.
I encourage people to engage in planning sooner versus waiting for a signal from the universe that may or may not come.
Let’s get down to dollars and cents. Once people have a vision, what are some of the key things they need to think about?
Catherine Collinson: You’ll need to estimate retirement savings and retirement income needs by using a calculator – or multiple calculators – and/or seeking the services of a professional financial advisor, either through your employer’s retirement plan provider or other financial institution.
Whether turning to software-driven or human experts, these resources can help you model scenarios based on your current age, income, and savings and investments. As well, they can help you model scenarios for your expected retirement age and time in retirement, sources of income, everyday expenses, big ticket expenses, health care and potential long-term care, and a host of other personal factors, which include macroeconomic factors, like estimated investment returns and inflation.
The models can tell you if you’re on track with your savings or if you’re behind – Al, in our research, a lot of people are behind, but there are ways to catch up. Based on the results of this modeling, you’ll be able to adjust certain assumptions that can improve your outlook, for example, perhaps by increasing your savings, aligning/realigning your asset allocation, and/or working longer and retiring at an older age. Reaching your goals may also involve some life changes during your working years and adjusting lifestyle-related expectations in retirement.
The ultimate goal is to make your savings last throughout your retirement – and avoid running out of savings. According to our survey findings, workers’ most often-cited greatest retirement fear is outliving their savings and investments (39%).
Al Waller: Agreed, Catherine – no one wants to find themselves upside down financially at any age of life, especially in what are considered our golden years. If I’m following you, all of this information is needed so someone can create their retirement strategy.
Catherine Collinson: Yes, you’re indeed tracking with me. There’s some good news in that once someone has done their homework and knows where they stand, they will be able to set forth a written retirement strategy and financial plan in line with their goals.
Al Waller: Catherine, this is very involved. I’m worried that it could be overwhelming for many people. What words of encouragement can you offer?
Catherine Collinson: If taking this on all at once is too much, then take things one step at a time. For example, a natural first step is using that calculator to estimate your long-term savings goals–experiment with the model, and then take a deep, deep breath when you see the eye-popping results. Doing everything all at once could get overwhelming, so map out the steps that you need to take – then, go through them one at a time. Maybe it's even like a checklist. Learn how even small changes in savings amounts or other adjustments could add up over time. Just keep at it …
A tip – I do myself – is that I gave up New Year's resolutions long ago because they never last past Groundhog Day. The first of the year, I create a checklist of financial-related things that I want to do over the course of the year. It could be something as big as reassessing the financial plan to something smaller, like checking with my insurance provider and making sure my coverages are still appropriate to mapping out a Saturday to scan all of my credit card bills, ensuring I've actually canceled those free 30-day subscriptions within the thirty days. (There are always stragglers that after the free look, I forgot to cancel.)
Have a list so that you are always focused and keep things moving along. It's like tending to a garden. The good news is that once you’ve laid the groundwork and forged a plan, then you’ll just need to update the plan periodically, as your life and financial situation evolve. Hopefully, you have a system or a process in place, so when things come up, you've already laid the groundwork.
Al, I do have one caveat or a heads up.
When you are nearing retirement, about your early to mid-50’s, you’ll face a new round of planning to help ensure that your savings will last your lifetime – or at least stretch them out as long as possible. This highly detailed level of planning involves decisions about your retirement accounts such as 401(k)s, 403(b)s, and IRAs, when to claim Social Security retirement benefits, selecting Medicare coverage, planning for long-term care, tax planning, and more. Give yourself a head start because it can get complicated really quickly.
Al Waller: Wow – Providing insights for pre-retirees should be another dedicated episode of this podcast. What do you think?
Catherine Collinson: Excellent idea – and, hopefully, it is something our listeners will look forward to.
Al Waller: You made an important point earlier that I want to underscore for our listeners, and that is … It’s okay to take things one step at a time when creating your retirement strategy. Give yourself a pat on the back when you complete a step, and then make sure you know what your next step is, so you can go for it when you’re ready.
Catherine, you’re giving our listeners a lot to think about. One more area that I’d like to touch on is mistakes. What are some common mistakes people make?
Catherine Collinson: That’s an excellent question. Based on our survey findings, I see three mistakes that worry me. I'm also going to say that I see others out there as well, and maybe that is a topic for yet another episode.
Here are the 3 mistakes:
- Guessing Retirement Savings. I made reference to Gen Z, but as I said earlier in the podcast, the amount of workers who are guessing crosses all 4 generations in the workforce, being Gen Z, Millennials, Gen X, and Boomers.
- A lack of clarity around longevity. When asked how long they are planning to live, 35% of workers say that they are “not sure,” which is an honest answer but not helpful for financial planning purposes. Life expectancy is a main variable in financial modelling and determining retirement savings and income needs. For planning purposes, a financial professional, your physician, and actuarial literature can offer suggestions. Of course, it’s also important to consider your personal health and family history. My fear is people may be aiming too low in this age of increased longevity. I have a grandmother that lived to age, 97, so I need to aim high. I'm not taking that longevity for granted, but I do want to avoid running out of savings should I live that long.
- A lack of knowledge. We've seen it for almost as long as we've been asking this question in the survey, which has been a couple of decades – people say they don't know as much as they should about saving and investing for retirement. We all just have to become better with this. Even when relying on experts to help, we still need to know enough to ask good questions and make informed decisions.
Al Waller: Thank you, Catherine, for your perspectives and insights on this topic. Where can people go to learn more about creating a retirement strategy?
Catherine Collinson: For those of you out there who like to read, I recommend hitting the books. There are a lot of great books with different points of view, ideas, and strategies. If you want to learn even more, consider taking a personal finance class. And be sure to check out the resources offered by your employer’s retirement plan provider or other financial services institution.
Additionally, FINRA—the Financial Industry Regulatory Authority – has extensive investor education and insights available on its website. For those who are considering working with a professional financial advisor, FINRA has BrokerCheck which is a free tool to research the background and experience of financial brokers, advisers, and firms. Visit www.finra.org.
Lastly, for our listeners who are interested in reading the report that we’ve been discussing, Post-Pandemic Realities: The Retirement Outlook of Four Generations, please visit our website at www.transamericainstitute.org.
Al Waller: Listeners, that’s all for now. Until our next episode, stay safe, be well, and thanks for listening.
ClearPath – Your Roadmap to Health & Wealth is brought to you by Transamerica Institute, a nonprofit private foundation dedicated to identifying, researching, and educating the public about retirement security and the intersections of health and financial well-being.
You can find our weekly podcast on WYPR’s website and mobile app, wherever you get your podcasts, and at transamericainstitute.org/podcast.
ClearPath – Your Roadmap to Health & Wealth is produced by Transamerica Institute with assistance from WYPR.
The information provided here is for educational purposes only and should not be construed as insurance, securities, ERISA, tax, investment, legal, medical, or financial advice or guidance.
