Too few Americans have calculated what it will take to be able to retire at their current lifestyle, J.P. Morgan Asset Management suggests in its annual Guide to Retirement.
In its 10th edition of the guide, the firm suggests that retirement checkpoint calculations can help investors to gauge quickly whether they are on track to afford their current lifestyle for 35 years in retirement based on their current age and annual household income.
The checkpoint section provides two alternative tables—for those making under and those making over $100,000—based on model assumptions. Users multiply their current household income by the checkpoint shown; the resulting amount is what they should have saved currently, assuming in the case of those making over $100,000 that they continue contributing 10%.
For example, for a 40-year old with a household income of $100,000, they would need to have saved $250,000 ($100,000 x 2.5) at that point in their life. It also provides a sample annual savings rate needed if the user were starting to save today and would like to maintain an equivalent lifestyle in retirement.
Among other things, the 90-page guide in the form of a slide deck analyzes various issues affecting retirement—including the impacts of longevity, spending behaviors and inflation on retirement—to help investors make informed decisions and take steps to achieve a comfortable retirement.
“Retirement investors and advisors are grappling with a range of challenging issues, from an evolving inflation picture to an increase in forecasted spending needs in retirement, and ongoing questions around Social Security,” notes Katherine Roy, Chief Retirement Strategist at J.P. Morgan Asset Management. “The 2022 Guide to Retirement has been designed to help advisors tackle the most pressing retirement challenges and provide strategies to help drive stronger retirement outcomes for clients.”
In the DC plan section, the guide provides an example of the benefits of auto-escalation based on model assumptions. For “Stubborn Sara,” who starts saving at age 25 but stays at a 3% contribution rate, her balance at age 65 would be $720,000. But for “Escalating Ethan,” who starts at 3% and increases 1% annually until capping at 10%, his balance at age 65 would be $1.6 million.
Following is an overview of five key retirement themes featured in the guide.
Plan for an even longer life (and how to do it well). Average life expectancy continues to increase, and investors need to plan on the probability of living much longer—perhaps 35 years in retirement—particularly for non-smokers who are in excellent health. Additionally:
- aging successfully is a key priority and individuals should focus on the ‘pushes’ in retirement; and
- investing a portion of their portfolio for growth is important to maintain their purchasing power over time, particularly in an inflationary environment.
Most Americans are spending more, then less, then more. Income replacement needs have risen across the income spectrum and now range between 72-98%. For households with estimated investable wealth of $1 million to $3 million, average spending is highest around age 50–55, and then declines until about age 80, when it begins to rise again. Those at older ages tend to spend less on all categories except health care and charitable contribution, the guide notes.
Keep inflation in perspective when planning for retirement. When planning for retirement, J.P. Morgan notes that it’s critical to take a long-term view, including planning for health care costs separately. For example, older households spend more on health care but less on transportation than households age 35-44, making them less vulnerable to the volatile energy category than younger households. Conversely, health care costs grew about half as fast as the long-term average in 2021.
“Stable versus variable” is the new “discretionary versus non-discretionary.” Aligning retirement income and assets based on how they will be used to support an individual’s retirement lifestyle is one way to ensure a higher degree of confidence through retirement. Known as “guarantee the floor,” J.P. Morgan’s analysis shows how stable spending can be aligned with relatively safe or guaranteed funding sources, while variable spending can be covered by retirement income solutions and may require a cash reserve to be available through the year.
