The Retirement Security Index
Can you measure the effectiveness of financial planning, especially when it comes to retirement?
Most retirees that have done at least some financial planning say they feel financially secure, a feeling that only intensifies the longer they live in retirement. Those findings are from MassMutual’s 2014 Hopes, Fears and Reality study1 about the expectations and experiences of retirement.
Overall, eight in 10 retirees indicate they feel financially secure, with the number moving from 77 percent for those retiring within the past five years to 83 percent for those who had been retired 11-15 years, the study reports. Call it the “Retirement Security Index.”
While a relatively broad segment of retirees were polled, it’s critical to note that the survey included only people who accumulated at least some savings and who had done at least some planning for retirement. Respondents were required to have at least $50,000 in savings and investments, and most had considerably more.
The study also looked at the differences between retirees who expressed the most satisfaction with their lives – the happiest retirees – with retirees who were less satisfied. Financial advisors should appreciate that the happiest retirees took specific financial planning steps – often at the behest of their advisor -- before stopping work:
73 percent calculated the best time to begin taking Social Security benefits compared to 64 percent of retirees who were less happy. The thinking behind the timing has changed drastically in recent years, with more advisors urging clients to hold off on taking Social Security benefits until later in life as a strategy to boost their retirement income.
65 percent set a target for how much money they needed in order to afford retirement. Only 53 percent of those who were less satisfied did the same. There is nothing like a goal to help focus and motivate us.
60 percent estimated their medical and dental expenses for retirement. Only 43 percent of less-satisfied retirees took this step. Failing to consider medical costs can be a humongous mistake. Fidelity Investments recently projected that health care will cost $260,000 for a 65-year-old couple in retirement. The projection includes expenses associated with Medicare premiums, Medicare co-payments and deductibles, and prescription drug out-of-pocket expenses.2
58 percent worked with a financial advisor, 10 percentage points higher than their less-happy colleagues. How many other professionals outside of financial advisors can say they measurably contribute to the happiness of others?
Half of the happiest retirees took other concrete financial steps such as creating a budget for retirement, increasing their savings before retirement, and rebalancing their investment portfolios. All important steps that those who report enjoying retirement less were less likely to take.
So planning may make a significant difference, especially when taking certain actions related to long-term financial security. Often, many of those who undertook specific planning activities did so within five years of retirement. For many, if was like stopping to look both ways before crossing the street. If they discovered they weren’t ready to cross, they could hold up and take specific actions to better prepare.
As a financial advisor, you may contribute significantly to your clients’ retirement readiness by recommending they take specific planning steps. Doing so will help boost their Retirement Security Index and overall happiness.
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Thomas Foster Jr. is Assistant Vice President, Strategic Relationships, for Massachusetts Mutual Life Insurance Co. (MassMutual).
1 Hopes, Fears and Reality, What workers expect in retirement and what steps help them achieve the retirement they want, https://wwwrs.massmutual.com/rsstaticfiles/retire/pdffolder/rs5853.pdf
2 Health Care Costs for Couples in Retirement Rise to an Estimated $260,000, Fidelity Analysis Shows, https://www.fidelity.com/about-fidelity/employer-services/health-care-costs-for-couples-in-retirement-rise
This article is for informational purposes only and should not be construed as legal, investment, and/or tax advice. Please consult your own legal counsel and other experts regarding the specific application of the information set forth herein to your own plan and/or circumstances.