Just give us your best guess.

Most financial advisors let the software do the heavy lifting when it comes to stress-testing a client’s retirement income plan with modern tools that can quickly run Monte Carlo simulations to address longevity risks. Useful as they are, though, a common problem has become inputting inaccurate Social Security benefit projections sourced from the Social Security Administration itself. As the agency has admitted, its estimates often cause individuals to either over or underestimate their future benefits, especially younger workers and women. It’s a problem that advisors will have to address in order to build successful retirement plans.

“We’ve looked into the issue and we do see many traditional planning models struggling with this,” said Sharon Carson, retirement strategist at J.P. Morgan Asset Management, adding that advisors usually overshoot on the benefit estimate. “It’s a problem when people end up with less income than they were expecting.”

Don’t Get Overzealous

If a client is currently earning $150,000 a year, the SSA calculates their primary insurance amount as if they’ll work for the same wage until retirement, plus a small annual inflation adjustment. In reality, they might not work that long or at wages that high.

“Most software either uses your most current salary as the starting point to back into an estimated Social Security benefit, or it asks someone to put in their primary insurance amount from their most recent statement,” said Marcia Mantell, a Social Security expert and founder of Mantell Retirement Consulting. “If you aren’t really close to your full retirement age, the numbers can get skewed and become overzealous.” Mantell’s other chief concern is that income planning tools aren’t inflating Medicare Part B premiums aggressively enough. “Best practice today is to project 8% to 10% Part B annual increases,” she warned.

The latest Chase consumer banking data shows American households earning $300,000 replace just 55% of their pre-retirement income on average after retirement, with 41% coming from private sources like 401(k) plans and 14% coming from Social Security. It sounds like a dramatic cutback, but a 45% reduction in annual income is not as big a lifestyle change as one might assume. “You have to keep in mind that these people are entering a stage of life where they’ve already paid off their mortgages, they’ve finished paying for their children’s college, they’re not commuting to work,” Carson said. “They don’t need to spend as much.”

People who are lower on the income spectrum may replace more of their income in retirement, but that doesn’t mean they’re better off. Take, for example, the average household with $100,000 in pre-retirement income:

• They replace 76% of their working income, with 33% of the money coming from Social Security checks.
• The replacement rate is higher, but their $76,000 in retirement income is lower in absolute terms compared with the wealthiest cohorts.

“A household at the $40,000 level replaces 95% of income, with more than half of that coming from Social Security, but you obviously wouldn’t say they are better off,” Carson said.

Are Cuts Coming? Many clients (and some advisors) believe Social Security’s shaky financial position makes benefit cuts inevitable, so they do things like claim early to get their hands on the money while they still can. “We think this is the wrong perspective,” Carson said. “Reforms aren’t easy to accomplish, but the political power of seniors is undeniable. It’s politically untenable to think that members of Congress would simply do nothing and let Social Security cuts happen.”

Retirement sometimes conjures up images of a smiling, silver-haired couple walking the beach. For others, however, it’s the fear of running out of money late in life. Others struggle to picture life after work at all.

Michael Kitces, the self-professed financial planning nerd and co-founder of the XY Planning Network, thinks of retirement as a two-fold concept that has long been fundamental to the work of wealth management professionals. There’s the accumulation question on the one hand, he told Retirement Upside, and the spending question on the other.

Financial advisors have mastered accumulation, as saving and investing have been the industry’s bread and butter for decades. The “decumulation challenge” is another matter entirely, one fraught with risks and little margin for error. The reality is that clients can do everything right on the front end, but still find even the best-laid retirement plans ruined by a combination of bad decisions and bad luck. Effective advisors, Kitces said, bring clients the insights, tools and tough love it takes to navigate their golden years with confidence.

“There’s a different set of soft skills and non-financial issues that crop up with retirement,” Kitces said. “It’s everything from new retirees struggling with meaning and purpose, to fears about late-in-life bankruptcy stopping people from spending what they can afford to spend.”

Retirement Upside sat down with Kitces to discuss key retirement trends, including the emergence of more advanced retirement income-planning tech tools.

Read more.

It was the best of times, it was the worst of times.

The stock market and peoples’ retirement savings may be up, but that doesn’t mean inflation and day-to-day expenditures are any less painful. Last year, the S&P 500 climbed more than 16%, and average retirement account balances increased 13%, according to Vanguard data. Yet a record 6% of workers with Vanguard accounts withdrew from their 401(k)s, up from 5% the previous year. It’s an unfortunate reality for many retirement savers because as much as they feel unprepared for retirement, they’re also worrying about the here and now. It’s also an opportunity for advisors to step in.

“People are looking everywhere, every possible corner, for money, and the 401(k) is probably one of the worst places to find it,” said Ed Slott, a CPA and longtime retirement planning expert.

Catch-22

Pulling money from a 401(k) is widely considered a last resort. Early withdrawals often trigger taxes and penalties, and participants lose the long-term benefits of compounding. “A lot of workers are seeing their retirement accounts go up on paper while their monthly cash flow is getting tighter,” said Daniel Milks, founder of Woodmark Advisors, adding that housing, insurance and childcare costs are rising faster than wages. “When budgets get squeezed, the 401(k) can start to look like the only accessible pool of money.”

The Vanguard report also found:

• The median withdrawal amount last year was $1,900, and the median account balance was just over $44,000.
• Roughly two-thirds of plans that offer automatic enrollment set default contributions at 4% or higher, and the bulk of them include annual automatic escalation.

So where should clients go when they’re in need of cash? There isn’t really a good answer, just less worse ones. Options include taking out a loan from their 401(k) and repaying it later, or reducing their contributions temporarily, but both can slow retirement progress. “If you do need emergency money, I hate to say it, but the best place is probably the Roth IRA,” Slott said, pointing to how contributions can be withdrawn at any time tax- and penalty-free.

Keeping Up with the Joneses: There’s also a behavioral element to savers withdrawing early, argued Ryan Marshall, a CFP with Cetera Advisor Networks. “Social media creates the impression that everyone is traveling, renovating homes, or living large,” he told Advisor Upside. “The reality is most people cannot afford that lifestyle, but some try to keep up.”

Plus, automatic plan enrollment and legislation in the past few years have made it easier for workers to access hardship withdrawals. That convenience can come with a cost. “Once someone taps their retirement account, it becomes psychologically easier to do it again,” Milks said. “The account shifts from being viewed as ‘retirement money’ to ‘emergency money,’ which can derail long-term planning.”