Just last week, global financial markets were stirring. But this past Monday, August 24, 2015, it reversed. Minutes after Monday’s opening bell, the Dow Jones Industrial Average had a record 1,089-point decline. At closing, it had plummeted 588 points.
Likewise, the S&P 500 index formally entered correction territory. At closing, it had recorded a loss of 77.68 points, or a 3.94% decline. Both closings were the biggest reversal seen since October 2008.
Retirement security is a driving concern for many Americans. It’s no secret as to why. Inadequate retirement savings, growing income expectations of Social Security, longer life expectancies, and record amounts of people retiring are all influential factors.
At the center of it, many individuals are worried about if they will outlive their retirement funds. It’s a growing concern given changing trends. According to U.S. federal government data, the average life expectancy is 78.8 years. Thanks to innovations in healthcare and technology, the human lifespan is longer than it’s ever been in history.
With opportunities for greater life longevity, how should people plan for the future? Read on to learn about some strategies you can adopt, whether you’re planning ahead or you’re currently in retirement.
In a previous blog post, we discussed how a stock market correction could affect retirement money. Of course market downturns aren’t the only factor which can drain retirement funds. Events such as emergency medical situations or unexpected personal crises may also lead to financial duress.
Being prepared is a key fundamental for retirement security. But many people aren’t taking those steps. According to various survey data, by 2030 almost 20 percent of Americans will be over 62 years old – currently the average age at which people retire. Data from the U.S. Census Bureau’s Supplemental Poverty Measure shows around 15% of Americans over 65 years old live below the poverty threshold. Moreover, almost 50% live “near poverty.” Or in other words, they have incomes which are less than twice the poverty threshold.
What’s the Future Look Like?
In past blog posts, among other things we’ve discussed the importance of portfolio diversification. Having too much of your money allocated in volatile markets – such as the stock market – can leave it vulnerable to market downturns. It could lead to sizable retirement losses – an outcome which often takes years from which to recover.
In late April to early May, the S&P 500 index was hovering at 2% below its record high. Given this trend, many industry analysts were calling for the possibility of a market correction of 10%. Marc Faber, editor of The Gloom, Doom, and Boom Report, had a less favorable forecast.
“For the last two years, I've been thinking that U.S. stocks are due for a correction. But I always say a bubble is a bubble, and if there's no correction, the market will go up, and one day it will go down, big time,” Faber opined on April 30, 2015 on “Trading Nation” on CNBC. “The market is in a position where it's not just going to be a 10 percent correction. Maybe it first goes up a bit further, but when it comes, it will be 30 percent or 40 percent [at] minimum!”
Why So Bearish?
There are many factors which can influence one’s retirement: healthcare costs, unexpected emergencies, periods of financial duress, or other situations. These variables can have a tremendous impact on a person’s future. It’s important to plan for any such occurrences ahead of time. In a previous blog post, we discussed tips on planning for retirement security.
There’s one factor which can greatly influence a long-term retirement strategy: having an “early” bear market. Or in other words, it’s when a major market correction – or a market downturn – leads to retirement account losses.
How can an Early Market Downturn Affect Retirement?
How much should Americans save up for their retirement? It's a question with many variables to consider. One big factor to answering it is future plans. That includes determining what age at which you'll retire.
According to the Center for Retirement Research at Boston College, the average retirement age has increased slightly over the past ten years. Changes in Social Security incentives, a broad switchover to 401(k) plans, greater quality of life, longer life expectancy, and improved education have been influential in the age increase. As a result, the average retirement age has increased to 64 years for men and 62 years for women.
According to the U.S. Census Bureau, the United States’ population in 2013 was almost 317 million people. Of that body, 14.1% were individuals aged 65 years and older. Women composed 50.8% of the population and men 49.2%.
There are more people reaching retirement age than ever. And retirement planning is a critical component of having a secure future. But retirement planning is a different process for women than it is for men. Women have different concerns, needs, and goals, and these differences should be accounted for in their retirement plan.
We've already covered how the retirement landscape in America is changing. One contributing factor is the changes being made to defined-benefit pension plans. In the private sector, defined-benefit pensions simply are disappearing. According to Towers Watson, over the last 15 years there has been a big decline in the number of largest American companies offering new hires defined-benefit pensions. That percentage took a 36-point nosedive from 60 to 24 percent.
For many people, one of the biggest concerns in retirement is medical expenses. It's easy to understand. According to Ron Mastrogiovanni, CEO of HealthView Searches, a research firm which provides healthcare data to financial advisers, healthcare costs are on the rise. In general, healthcare costs are increasing 5-7% per year.
In a recent white paper from HealthView Services, data indicates healthcare costs will exert a heavy hand on the retirement landscape now and in the future, too. A healthy couple retiring at age 65 this year will require a little over $266,000 to pay for the costs of Medicare Parts B and B and supplemental insurance for their lifetime. Likewise, for a healthy couple that is 55 years old and retiring 10 years from now, those costs will shoot up to roughly $320,000.
In the past, we've talked about looming concerns over retirement security. It's no small matter for the American public. According to the Investment Company Institute, at year-end 2014 the United States retirement market had $24 trillion in assets.
Here's what the asset breakdown looked like: