With the onslaught of the Covid-19 virus and the uncertainty it has created, we have seen interest rates fall to historically low levels and the stock market experience a substantial correction. Both of these financial events impact the returns you can expect from your savings for the non-working years of your life. Let’s take a look at what I call your Fulfilling Stage Income Challenge, how these lower returns could impact your savings efforts, and why saving for later life may get a lot harder.
As you end your full-time working years or the Striving Stage of the FinancialVerse, you begin what I call the Fulfilling Stage of your financial life. During this stage you pursue the things that bring you the most joy and fulfillment. These could be travel, family, volunteer work, or for some - continuing in a business they enjoy. To get the most enjoyment from these likely non-working years, you need to have cash income to pay your living expenses. This income has to cover all of your expenses. The key questions are what amount will you need and where will you get it? These are the questions you see in articles discussing retirement income and savings needs.
Let me paint a simple and understandable picture of the Fulfilling Stage Income Challenge you face. As most people stop full-time work in their early 60's or older, their annual cash flow will look something like this:
Income will come from Social Security + cash withdrawals from 401(k) plans + cash withdrawals from personal savings + any retirement benefits earned + income from part-time work.
Expenses will equal basic living costs + likely additional medical costs less any work-related costs that are no longer being incurred, such as commuting expenses or needed costs for work clothes.
The Fulfilling Stage Income Challenge is to have the cash flow coming in such that expenses are fully paid with some excess left over for unexpected items.
For most people today, they have relatively little saved in their 401(k)s and in personal savings. This results in them having to depend on Social Security retirement benefits for the bulk of their income later in life. What most folks don’t realize is that Social Security is designed to replace only 40% of the average workers income when they stop working. This translates into an average monthly benefit of around $1,600 for most people. Only 40%! Most people can’t live on this amount each month. They need to make up the difference between Social Security and their expenses through other means.
Here is how today’s economic conditions will impact your future income challenge:
If future interest rates remain as low as they are today, you will need to save more money to accumulate sufficient assets to provide the cash withdrawals you will need to live.
If the stock market has much lower returns, you will need to save more money in order to build the cash assets you will need to withdrawal when you stop working.
The bottom line is that lower interest rates and stock market returns mean you will need to save more of your current earnings in order to have the cash you will need later in life. These lower returns can have a dramatic impact on savings plans. My best advice is to start saving as early as you can. Work with a financial planner to put a plan in place to guide your efforts. You must have a strategy or your non-working years could be quite a challenge and the quality of your lifestyle could be significantly lowered.
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