Systematic Relative Strength

With more and more investors now responsible for their own retirements through their 401k plans, advisors have one more thing to worry about. At many firms, advisors are not able to handle the 401k plan directly, but clients still ask for advice and information. One of the most important pieces of information is how much to save. From the Washington Post:

At the core of any reform, Munnell said, there has to be massive education of employees on how to plan for retirement. Many people think that saving 6 percent with a 3 percent match, for example, is enough. Not so, according to the Center for Retirement Research.

As a baseline, the group estimates that a household earning at least $50,000 needs roughly 80 percent of its earnings to maintain its pre-retirement lifestyle.

To pull that off, a person who is 25 and earns $43,000 needs to be saving 15 percent a year in order to retire at 65, assuming a 4 percent rate of return on his investments. Wait until 35 to start saving, and the necessary savings rate creeps up to 24 percent.

The solution for many people, Munnell said, will be to work longer. If that 25-year-old doesn’t retire until 70, he would only have to save 7 percent a year.

When you do the math, that 15% savings rate comes up a lot. If your investments do really well, it might turn out that you saved too much. But under a lot of scenarios, especially adverse ones, a 15% savings rate will often bail you out. Advisors can have a huge impact in getting their clients to save.

The alternative of having to go back to work at an advanced age because your savings were inadequate is not very appetizing. (And let’s face it: if you’ve been in the business for 25 years or more like I have, you’ve seen this happen to clients who were unwilling to save.) If it’s a question of living too well in retirement—well, that’s something most clients will not lose sleep over.