While a million dollars may sound like a lot of money, in reality, it's only "table stakes" in funding a retirement that could last 25 to 30 years, a new report suggests.
Even before suffering losses in their 401(k)s and other retirement vehicles this year, high net worth individuals (HNWIs) were concerned about their ability to retire securely, according to findings from Natixis Investment Managers' survey on millionaires' outlook on their financial security in retirement. These U.S. investors are worried about their eventual ability to retire comfortably - even with $1 million or more in assets. And this year's market shocks and accompanying portfolio losses have made it that much worse, according to the firm's report, "The Million Dollar Question: How Much Do I Need to Retire?"
Natixis found that on the surface most (79%) say they will be financially secure in retirement, but deeper down they are far less confident.
More than a third (35%) of millionaires believe "it will take a miracle" to achieve a secure retirement, while more than 4 in 10 (42%) HNWIs are so worried about retirement security that they avoid thinking about it all together.
The firm also found that, despite intentions to retire at the relatively early age of 63, almost 6 in 10 (58%) HNWIs accept that they may have to work longer than they planned. Yet it may not be that easy, as 44% of respondents worry that they may not be able to keep working as long as they'd like.
Meanwhile, inflation concerns and rising interest rates are also posing problems for retirees and savers alike. "A decade of historically low rates impeded investors' ability to annuitize assets, leaving many retirees with a less-than-ideal income," observes Liana Magner, Executive Vice President and Head of Retirement and Institutional in the U.S. It's true that the overall level is still low from a historical perspective, but rates are now rising on higher government debt. Together with persistent fears of a global recession, we're seeing new risks emerge." Magner suggests that those hoping to retire need a new playbook, including education, planning, tools, and policy to meet the retirement challenges. The Natixis executive also notes that, although the impact of inflation and low rates could soften, one thing impacting those living in retirement are rising healthcare costs. A large majority of those surveyed (65%) acknowledge that healthcare costs and lonq-term care costs will have a big impact on financial security in retirement.
Adjusting to Reality
If retirees want to ensure their nest egg lasts 20 years or more, Natixis suggests that they'll need to moderate withdrawals. In recent years, retirement income strategies typically call for taking 4% of assets as income in the first year of retirement and then only 4% plus the rate of inflation each year for future withdrawals.
With a $1 million balance, this comes down to an income of just $40,000 as a starting point - a figure that is likely to be well below pre-retirement income for many, the firm says. This is why investment professionals and financial planners recommend a three-pronged approach to retirement income that taps retirement savings, personal savings and public benefits, the report emphasizes.
"A million may seem like a lot, but many people are surprised when they do the math and realize that 4% of $1 million is only $40,000 yearly," explains Dave Goodsell, Executive Director of the Natixis IM Center for Investor Insight. "This is usually quite a bit less than these individuals are likely used to living on annually. This underscores why it's so important to work out all the assumptions and do the math early when making plans - and why professional advice is necessary."
The report further observes that the 60/40 rule - denoting a portfolio of 60% stocks and 40% bonds - does not account for emerging risks to the equity portion or a low-rate environment, which is bad for bonds. "Even as rates go up, it will still take time for them to reach a comfortable level for generating a consistent income for retirees," the report emphasizes.
In the meantime, more than half (58%) of HNWI respondents recognize that low rates will make it difficult to generate an income off their savings. Investors would likely do better to diversify their holdings, in consultation with a trusted financial advisor, the firm observes.
The "three-legged stool" of retirement funding - Social Security, employers and individuals - may also require a shift, Natixis further suggests. Amid concerns about the long-term viability of Social Security and rising public debt, 31% of respondents believe it will be difficult to make ends meet without Social Security.
The findings in this report are based on a survey of 1,617 individuals who have accumulated $1 million or more in investable assets and who participated in Natixis' 2021 survey of 8,550 investors in 24 countries.