CLIENT ACCOUNTS

Recently Viewed Accounts

You have no recently viewed accounts.

Select your location

Who are you ?

Select another location

Wer bist du ?

Wählen Sie einen anderen Ort

Qui êtes vous ?

Sélectionnez un autre emplacement

Qui êtes vous ?

Sélectionnez un autre emplacement

Qui êtes vous ?

Sélectionnez un autre emplacement

Wer bist du ?

Wählen Sie einen anderen Ort

Wer bist du ?

Wählen Sie einen anderen Ort

Qui êtes vous ?

Sélectionnez un autre emplacement

Wer bist du ?

Wählen Sie einen anderen Ort

Qui êtes vous ?

Sélectionnez un autre emplacement

Who are you ?

Select another location

Who are you ?

RETIREMENT PLAN INVESTOR

Use your plan ID (available on your account statement) to determine which employer-sponsored retirement plan website to use:

IF YOUR PLAN ID BEGINS WITH IRK, BRK, 1, 2 OR 754

Visit americanfunds.com/retire

IF YOUR PLAN ID BEGINS WITH 34 OR 135

Visit myretirement.americanfunds.com

Categories
Retirement Planning
A framework to address retirees’ biggest fear
Kate Beattie
Senior Retirement Income Strategist

Of all the things that keep retirees up at night, their biggest fear is running out of money. How long will I live? Will my investments hold up? Will unexpected costs or events erode my savings?


Solving for retirement income is one of the biggest challenges facing the retirement industry today. In order to better understand how retirees save and think of their retirement assets, Capital Group conducted in-depth qualitative interviews and surveyed 800 retirees and near-retirees. We found that many retirees live with the fear of running out of money. This fear comes in part from thinking about their assets as a single lump sum that must cover all conceivable expenses.


On the other hand, investors who think of their assets as discrete buckets, or “building blocks,” to serve specific needs — such as living expenses, discretionary spending, unplanned emergencies and legacy —arguably have a better framework to manage retirement planning without fear.


The building blocks of a confident retirement


We believe that conceptualizing assets as building blocks can have the positive effect of helping retirees adopt a mental accounting framework for their assets — making it easier for them to understand, quantify and prioritize their retirement spending and legacy objectives.


1. Living: Are essentials covered?


Retirement confidence hinges on having a high degree of certainty that day-to-day necessities such as food, housing, transportation and health care can be paid for. Investors should review protected and non-protected income sources for sustainability of lifetime income.


2. Lifestyle: What are your optional expenses?


The lifestyle block includes discretionary spending — the spending you can live without, if necessary, such as travel, spending on grandchildren, dining out and entertainment. What constitutes a lifestyle expense will vary from retiree to retiree, as will their comfort level with variations in income and spending as their lifestyle evolves over retirement.


3. Emergency: Do you have a cash cushion?


An emergency fund can provide retirees with more confidence in their ability to weather unexpected market, health or household expenses. Investors should plan for the unexpected and have ample cash and/or more readily liquid reserves on hand.


4. Legacy: Do you plan to pass on your wealth?


For some, leaving a legacy is a defining goal of a wealth planning strategy. Many others simply plan to leave behind “whatever is left.” Assets to support legacy, living and lifestyle are often invested together in a single portfolio designed to balance income, growth and capital preservation objectives.


Putting the building blocks into action


What is the optimal withdrawal rate for a couple’s retirement portfolio? In this hypothetical example, Harry and June used the four building blocks framework when they discussed their spending goals and available resources with their advisor.

  • Their annual basic living expenses are $40,800. They would like to set an objective to achieve 100% confidence in meeting these essential living expenses over their lives.
  • They desire $27,200 annually for their lifestyle expenses in retirement. Since they have more flexibility in achieving this spending goal, they agree to be 75% confident of reaching it, given that the portfolio needs to balance income, growth and asset preservation.
  • They have cash savings of $45,000 in their emergency fund for any unforeseen expenses.
  • They would like to leave a legacy for their children, which would include the family home valued at $500,000.
  • Their $1,000,000 portfolio would need to generate $40,000 ($68,000 less $28,000 from Social Security) to cover both their living expenses and desired lifestyle spending — a 4% withdrawal rate.

Testing the income plan against multiple outcomes


To stress-test this 4% withdrawal rate’s ability to confidently support both living and lifestyle expenses, their advisor looked at a Monte Carlo simulation, which calculates probabilities based on a large number of market return scenarios. Since Harry and June were most concerned with downside risks, the simulation focused on the lowest 10th percentile of possible outcomes.  


According to the simulation, the standard 4% withdrawal rate may be too ambitious in their case. With the proposed split between living and lifestyle expenses, weighted for a combined success rate of 90%, the simulation shows a withdrawal rate of 3.4% or less would provide more confidence in sustaining their spending needs. The analysis suggests that Harry and June may need to discuss with their advisor the trade-offs and implications of decreasing their spending objectives, delaying retirement, portfolio adjustments, as well as exploring opportunities to increase their level of protected income to improve their overall confidence in retirement.


Building retirement confidence — one client at a time


With the help of an advisor, a building blocks framework may help retirees achieve a greater sense of confidence as they navigate the many unknowns of retirement. Such a framework helps create retirement income portfolios designed to pursue desired lifestyle and legacy goals with a high degree of confidence.


READ THE FULL PAPER



Kate Beattie is a senior retirement income strategist with 15 years of industry experience (as of 12/31/2021). She holds a bachelor’s degree in economics with a business administration minor from Colorado State University and holds the Certified Financial Planner™ and Retirement Income Certified Professional® designations.


Never miss an industry-leading insight

The Capital Ideas newsletter delivers weekly investment insights straight to your inbox.

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and should not be considered advice, an endorsement or a recommendation.

All Capital Group trademarks mentioned are owned by The Capital Group Companies, Inc., an affiliated company or fund. All other company and product names mentioned are the property of their respective companies.

Use of this website is intended for U.S. residents only. Use of this website and materials is also subject to approval by your home office.

American Funds Distributors, Inc., member FINRA.

This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and should not be considered advice, an endorsement or a recommendation.