Financing longevity: how saving for retirement has gotten harder

Preretirees worry about the economy and their retirement 

After almost two years of the pandemic and its many shock waves, we asked people age 50 and older how they’re feeling about their finances. And although this age group is usually less stressed than their younger co-workers, this year, they’re the most pessimistic of all age groups about the speed of the economy’s recovery. Furthermore, the top two worries for people 50 and older are the economy and their retirement savings, respectively—two worries that grow more linked as retirement gets closer. Well over a third said their savings are behind schedule, while almost a quarter said they believe they’ll have to delay retirement, and 18% weren’t sure if they could retire when they’d planned. 

A large majority—81%—of our participants age 50 and older want to be more confident making financial decisions. It helps to explain why the percentage of participants working with a financial advisor has doubled since 2014, from 19% to 36%, and why there’s an increase in investors seeking professional guidance as they get closer to retirement.¹

People need guidance with basic retirement planning decisions 

So, what’s driving preretirees to seek professional help? Retirement planning requires lots of decisions that have far-reaching financial implications. Even just creating a retirement spending budget means deciding:

• When to retire
• Where to retire
• Partial or full retirement

A financial advisor can help participants understand the financial implications of where they retire, when they retire, and whether they’ll need to supplement their income with part- or even full-time work to fund what they plan to do in retirement.   

And there are savings and income-related decisions to make, including:

• How to allocate their investments
• How to draw down their savings in a tax-efficient manner
• When to take Social Security to help optimize overall benefits

The pivot from saving to decumulation often requires personal guidance. Many people reach retirement without understanding the tax implications of all their retirement income sources—pretax, Roth, Social Security, defined benefit, and taxable. The drawdown decisions will need to factor in not only taxes, but also longevity. Which investments are more likely to grow while minimizing risk—and what growth factor should be expected to be sure the income stream lasts through retirement? 

Longevity, inflation, and market volatility add uncertainty to retirement planning

Once the basic decisions are made, there’s still plenty of uncertainty in forming a plan for retirement—and recently, the uncertainty has also increased. 

First is longevity. A 55-year-old man or woman today can expect to live to an average age of 82 and 85, respectively—and by 2060, 15% of the population will be 100 or older.² What we call retirement can last 30 or 40 years, which is as long as many careers. But how do you know how much to save if you don’t know how long retirement will last? 

Second is the economy, with uncertainty increasing in three areas: inflation, market volatility, and interest rates. 

• Inflation—Anyone who’s been running a household budget for the past three decades is used to having pretty stable inflation, but rising inflation is suddenly making budgeting harder, both for the short and the long term. How can participants set saving goals when they don’t know how much gas and milk will cost in retirement?
  
• Market volatility—Anyone who retired between 2016 and 2020 did so in a booming stock market. But how should people invest when market volatility can show up so unexpectedly, especially when you’re approaching or in retirement? 
• Interest rates—For the last decade, we’ve lived with historically low interest rates. How should retiring participants invest in an era of rising interest rates? 
   

An opportunity for financial professionals amid the uncertainty

Greater longevity increases the amount of time a retiree’s financial plan is vulnerable to complex external factors. Although the economic challenges of the pandemic may fade with time, they serve as a reminder of the level of uncertainty people face as they save and invest for retirement. What’s worked in the past may not work in the future—which is an opportunity for financial professionals to show their value. The expert guidance of a financial professional can be critical in helping preretirees incorporate changing economic conditions into their financial planning, so they can enjoy their extra years of retirement. 

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1 John Hancock’s eighth annual financial stress survey, John Hancock, Greenwald & Associates, July 2022. This information is general in nature and is not intended to constitute legal or investment advice. Greenwald & Associates and John Hancock are not affiliated, and neither is responsible for the liabilities of the other. This report presents the results of research conducted by Greenwald & Associates on behalf of John Hancock. The objectives of this study were to (1) quantify the financial situation and level of financial stress of John Hancock plan participants; (2) determine the key triggers of financial stress; (3) understand the extent to which actions, including actual financial behavior and planning activity, ameliorate stress; and (4) assess retirement preparation and readiness. This was an online survey of 1,162 John Hancock plan participants. The survey was conducted from 8/4/21 through 9/3/21, with an average survey length of approximately 19 minutes per respondent. Respondents were located from a list of eligible plan participants provided by John Hancock. All statistical testing is done at 0.95 and 0.99 significance levels. The maximum margin of sampling error at the 95% confidence level is 4.1%. 2 “2017 National Population Projections Tables: Main Series,” census.gov, 2017.