Living benefit riders to life insurance policies: Pricing considerations and strategy
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Almost every financial website you log into these days provides some type of retirement planning tool. You enter a few key pieces of data into the tool and can find out right away your outlook on retirement. But how reliable are these scores? What factors make the estimates too high or too low? Here are some considerations, benefits, and possible pitfalls.
What does a retirement planning tool do? Many financial institutions offer retirement planning tools on their websites. You enter your estimated savings, contributions, alimony, rental property income, estimated social security income, etc. and the tool tells you whether you can expect to cover your expenses in retirement. Most retirement planning tools calculate a probability of success to measure your ability to cover retirement expenses, or may tell you how much you are expected to accumulate by retirement age, or how much your income and portfolio withdrawals are expected to be. Some of the tools provide a gauge of how well your retirement readiness is compared to peers or a general grading by comparing your retirement outlook to the weather, for example. No matter your outcome, there are some key benefits to using a retirement tool.
It can provide direction on savings goals. The general rule of thumb across the majority of tools is to have enough saved so that your retirement income is roughly 80% of your final preretirement salary. If you are making $100,000 prior to retirement, you will need $80,000 per year to live comfortably when you retire.
Just answering the questions within the retirement planning tool will help you identify how much you have saved so far in your various retirement accounts (401k, Roth 401k, 403b, brokerage account, HSA, pension, traditional IRA, Roth IRA, etc.). The tool will identify whether or not you are on the right track to get to that 80%.
If you appear to be behind on your retirement savings goals, several tools provide advice on how to get started on making up that deficit. Some of these include:
Some tools will calculate your estimated Social Security income for you or allow you to enter your own estimated amount.
It can help you identify retirement readiness. How prepared are you for retirement? The retirement planning tools will consider what sources of income you will have, what your expected expenses will be, how much you will receive from Social Security, and more.
Breaking down your sources of income helps you to see how much you can expect to bring home on a monthly basis. How many sources of income do you have? Will you be willing to work part-time? Should you start thinking about investing in rental properties?
How much will your expenses be in retirement? How much of those expenses are wants versus needs? Are you someone who may spend more in retirement (second home, boat, medical, etc.)? Many tools offer a retirement budget worksheet to help you determine exactly what your expenses will look like when you retire. These budget worksheets can vary. Some may list your general expenses like housing, food, transportation, healthcare, etc., while others break down each category in smaller details.
Social Security income is also captured in retirement planning tools. Many times, the tools will be able to estimate your Social Security income for you or will direct you to SSA.gov to calculate it yourself.
Healthcare costs in retirement are also considered in retirement planning tools, forcing you to ponder how much healthcare really does cost after retirement or if you can afford to retire before age 65, the age when Medicare kicks in.
In reviewing your retirement income, expenses, Social Security income, and healthcare, you will be able to determine how ready you are for retirement.
It can aid in establishing a retirement date. When you enter all of your data into a retirement planning tool, you can run estimates based on your retirement date. Can you retire early? Do you need to work later in order to have the income you need to cover your expenses? The tools can help you determine what age is the ideal age for you to retire.
If you want to retire early, you can enter your early retirement date and bump up your savings goals to make sure you hit that goal. On the flipside, you may realize that you need to work longer than expected to live comfortably in retirement. Either way, retirement planning tools can help you set a retirement date so you have a goal in mind.
Search the internet for retirement tools and there are many options. No two tools are identical, and they often provide differing opinions on your retirement forecast. With all the factors that go into your retirement planning, how actionable are the results? Savings and spending are two factors you can control when it comes to retirement planning.
Retirement plan changes. Does your retirement savings plan rely on a defined contribution plan match or a pension? While these benefits are typically seen as an attractive recruiting tool and a generous portion of an overall compensation package, retirement benefits are not always guaranteed. Future pension accruals can end with a plan freeze and employer-matching contributions for your defined contribution plan can be limited or stopped. World events, like the coronavirus pandemic, can influence the decision to reduce or stop a company match or allow participants to take an otherwise unavailable early distribution. If left unaccounted for, a major plan change or event can have a huge impact on your projected retirement.
Real estate market. What is happening in the real estate market? Are home values rising and houses selling after a few days of being listed, or does it take months and numerous seller concessions to convince someone to buy? You may not be considering your housing situation now, but when you are ready to retire, it is possible that your living requirements will have changed. If you are expecting to sell your home for a profit to help fund your retirement, retirement planning tools will not help you anticipate the effects of the real estate market.
Interest rates. Interest rates affect various aspects of everyone's life. We have seen historically low rates, which makes the cost to borrow cheaper, causes liquid savings to grow more slowly, or can even give you a larger optional lump sum from your pension if you have one. These are just a few ways that fluctuating rates can affect your retirement plans. You can expect the opposite effect if rates begin to climb; the lump sum from your pension plan decreases while loan rates increase.
Technological issues. We cannot forget the people behind these planning tools. Let’s face it-- people are prone to errors. Even with extensive review and testing, it is possible for there to be glitch in the coding. A simple mistake could drastically affect your projections and these inconsistencies could be hard to catch if your projections are run infrequently.
Inflation. In general, inflation has gone up, which means that prices for goods and services increases. That in turn means the value of the dollar buys less than before. Essential, basic living expenses such as food, gas, housing, and clothes will typically end up costing more in the future. Medical expenses also tend to fluctuate with inflation.
Longevity. How long you end up living directly equates to the number of years you will be retired. Average life expectancy and your overall health may help in estimates, but really, no one knows what the future of our health or life holds. The longer you live, obviously the more retirement funds you will need.
Retirement behavior. Once you retire, you may start making regular withdrawals or selling your investments. You and your investments may be affected by sequence of returns risk. This is where the overall amount of income from investments will be reduced if you face a high degree of negative returns earlier on in your retirement. Most tools will assume a steady, simple rate of return, which is not an effective or realistic way to plan retirement.
Some people expect to take on a part-time job to help supplement retirement income. While this could aid in making your retirement funds last longer, you may want to consider the possibility that these part-time roles may be unavailable to you.
Debt. Unemployment, poor spending habits, and unforeseen emergencies can lead to unplanned debt. How will debt repayment factor into your budget? Most tools should factor in monthly expenses and spending in retirement, but how will you approach covering debt repayment? Perhaps you plan on entering retirement without owing a dime or maybe you see debt as a constant in life. Either way, plan your retirement budget accordingly.
Unplanned early retirement. Many of us assume we will work right up to retirement, but downsizing, health, or health of a loved one may cause a shift in your retirement timeline. Even if you can get a new job, there is no degree of certainty that you will be able to replace the same income and benefits to which you were accustomed. An unexpected early retirement will call for a reevaluation of your retirement plan and a tool may not provide enough scenarios for you to forecast what the effects are.
Retirement planning tools can provide general guidance, but the path to retirement is not set in stone. We cannot guarantee what will happen next year, and guessing the financial conditions for retirement 20 or 30 years from now is nearly impossible. With so many factors affecting retirement, focus on what you are able to control-- savings and spending-- and plan for the unexpected. No matter what stage you are in, retirement must be prioritized. If there is one thing that experts agree on, it is that saving should start early. Prepare yourself to budget, both now and for the future, and be sure your goals are realistic and not lofty and unattainable. Accept that not all risks can be avoided, and everyone’s risk tolerance may not be the same. Plan on being flexible. Your path to retirement may end up taking a different direction than you originally thought.