The right mix for retirement funding doesn’t necessarily mean million-dollar portfolios, but should include advice that allows “chunky spending,” addresses employment outlook, avoids unpleasant retirement surprises, and analyzes living arrangements, a new report suggests.
In fact, it looks as if the so-called three-legged stool might be expanding, so to speak. Future retirees anticipate drawing from more funding sources than today’s retirees, as only 28% of current retirees receive four-plus sources, compared to nearly half (48%) of future retirees who expect to have four-plus.
This is according to Hearts & Wallets’ “Getting Real About Retirement: Breaking Through with Better Solutions for ‘Chunk or Nothing’ Spending, Work & Real Estate,” which examines realities vs. expectations for retirement, funding and spending, work-span, real estate and advice. The report draws from all three of the firm’s proprietary databases, which track what U.S. households do with their money, what they want in the future and how the financial services industry is responding.
Not surprisingly, work is a funding source where expectations of future retirees are at odds with reality. Too many future retirees anticipate having work as an income source, and those who will be able to work often underestimate the role work can play, the report notes. Since the firm began tracking this data in 2010, employment has been part of the income mix for only 1 in 5 retired households.
Meanwhile, many households have equity in homes and other real estate that is equal to or greater than their investable assets. Yet, according to the report, 8 out of 10 advice experiences today do not address real estate. At the same time, nearly 8 in 10 (79%) households age 65-plus own their primary homes, with rising valuations and low or paid-off mortgages. Hearts & Wallets estimates that 47% or 17.3 million of these households have at least as much net equity in real estate as investable assets.
'Chunk or Nothing' Spending
Most retirees also engage in “chunk or nothing” behavior, which Hearts & Wallets also began tracking in 2010. Some retirees take little-to-no income, while others take chunks for necessity or fulfillment. The behavior of taking chunk or nothing in retirement is prevalent, especially for households age 65-plus with under $500,000, but it also occurs among wealthier households.
“Tapping into capital elicits the strongest emotional reaction from consumers of any qualitative topic Hearts & Wallets has examined,” observes Amber Katris, Hearts & Wallets Subject Matter Expert. “The financial services industry can do more to empower consumers who want or need to take these one-time funding chunks, which can often be at odds with annuitization.”
Retirement Surprises
Addressing retirement surprises is another area that is ripe for consideration, according to the report. Most retiree households (84%) have experienced surprises in retirement vs. their expectations. These surprises run the gamut from having retirement being more enjoyable than anticipated to living more frugally or stopping work sooner than expected.
What’s more, households that are professionally advised are just as likely to experience surprises as households that are not. Advice, however, can have a positive impact. The “good surprise” of “having more time and less stress” is higher for professionally advised households compared to the unadvised in the $100,000 to under $3 million investable asset ranges.
That said, the level of financial wellness to stave off the worst controllable surprises in retirement is fairly minimal at 3 to 5 times assets-to-income, the report suggests. According to Hearts & Wallets’ data, the incidence of being “forced to live more frugally than expected” is flat until retirement income replacement rates fall below 50% of less. As such, most customer advice experiences today overstate needs by using target retirement income replacement rates within a narrow band around 80% for income replacement rates, the report contends based on the firm’s data.
Sizing Opportunities
With all of this as a backdrop, the report then turns to the dollar figures that potentially could be unlocked by broadening the definition of retirement income to include these topics.
According to Hearts & Wallets market sizing, certain often-neglected advice areas of “retirement income” are each about $15 trillion—or three times traditional “retirement income” market definitions.
- The first area, more personalized human capital planning, would help the 88.1 million households 65 years of age and older with $19.7 trillion.
- The second, adding living arrangements to advice, would help 23.3 million of the 65-plus-year households with $14.1 trillion.
- The third, solving for the needs driving “chunk or nothing” spending behavior—which involves either large one-time expenditures or take nothing or very little—would help 18.9 million 65-plus-year households with $15.4 trillion.
“In addition to income replacement, financial advice should help consumers to consider retirement surprises, work capacity, living situations and ‘chunk-or-nothing’ spending,” notes Laura Varas, Hearts & Wallets CEO and founder. “A high priority should be on inspiring saving, so the 70.5 million households of all ages with less than $50,000 in assets have a minimum safety net as they age. Firms that can understand, size and build for these consumer behaviors will carve out niche products and advice experiences in the large and growing U.S. retirement market,” she further emphasizes.
The findings are based on the Hearts & Wallets Investor Quantitative Database, which has over 120 million data points on saving, investing and advice behaviors from 76,000 U.S. households dating back to 2010. The latest wave was fielded Sept. 11 – Oct. 6, 2023, among 5,846 U.S. households. The report also draws from the firm’s Explore Qualitative database, which contains 8,000 qualitative consumer reactions among 118 topics studied since 2010, and the Inside Advice database, which benchmarks advice experiences.
