Begin at the End When It Comes to Saving for Retirement

by: , DCIO National Account Senior Associate, New York Life Investments

When thinking about retirement, the goal for investors is to put as much money away now to be used later. But, do investors know how much they should be saving if they don’t have a desired outcome in mind? Once they have a desired outcome, do investors know how to invest to have the best chance of reaching that outcome?

There are several considerations for saving for retirement. How much to contribute, whether there is a company match, are contributions pre- or post-tax, whether to contribute to a Roth account, what are the fees, and what are the investment options are just a few. As investors approach retirement age there are additional questions to consider. What does the investor want their retirement to look like? Do they plan to move or downsize, travel, or help heirs with education costs? Living situations can change at any time, and so can priorities as well as desired retirement goals.

One major concern in retirement is rising health care costs. Health care expenses are one of, if not, the biggest potential liabilities retirees face. According to Fidelity Benefits Consulting, “a 65-year-old couple retiring this year will need an average of $275,0001 (in today’s dollars) to cover medical expenses throughout retirement, up from $260,000 in 2016”. And, unfortunately, costs continue to rise.

Another concern is the phase-out of traditional employer-funded pension plans. Over time, employers have shifted away from defined benefit plans to defined contribution plans, such as 401(k)s. Broadly speaking, defined benefit plans are designed to guarantee a stream of income to a retiree and possibly a beneficiary, based on actuarially determined formulas. Upon entering retirement, the retiree is promised lifetime income, as determined by a benefit formula and the retiree’s payment election. A defining characteristic of a defined benefit plan is that the employer assumes all the investment risk as well as the responsibility for ensuring the payment of benefits. A defined contribution plan shifts investment risk to the employee, thus making it more difficult to predict income levels in retirement.

Advisors and retirement investors should be concerned about whether they can accurately predict the amount of future income required. Certain products alleviate some of the pressure investors feel when picking their own investments, but it still may be difficult to predict earnings that will be generated by a defined contribution plan account. Target date funds, which have dominated the retirement plan space in recent years, were designed to invest according to an approximate retirement date, using a glidepath to determine the allocation of assets. One of the shortfalls of more traditional target date funds is that they fail to consider the personal needs of an investor by investing solely based on a retirement year and not the individual needs or retirement goals. Target date funds continue to evolve; however, there may still be income unpredictability.

Advisors can play a critical role in helping retirement investors get closer to their desired outcome. Rather than relying on products like target date funds alone, advisors may consider individual goals to create solutions that incorporate any number of variables, as opposed to only a retirement date.

In addition to pure performance and anticipated retirement date, advisors and their clients can also discuss outcome expectations. Thus, if an investor’s goals are too lofty or unattainable at current income and contribution levels, advisors may suggest, if suitable, increasing contributions, or placing less money in cash positions. Moreover, it may also help set a more realistic portrayal of what the investor may expect; and therefore, they may be able to build more attainable retirement goals.

There are no perfect solutions for achieving desired income levels. Advisors may offer aid by taking a more comprehensive look at an investor’s future goals and evaluating them against their current situation (portfolio makeup, performance, rate of savings, etc.). By creating a custom solution instead of relying on broad, non-individualized products, advisors may offer an opportunity for retirement investors that more accurately projects future income levels.

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Target Date Funds – The “target date” in a target date fund is the approximate date an investor plans to start withdrawing money. Because target date funds are managed to specific retirement dates, investors may be taking on greater risk if the actual year of retirement differs dramatically from the original estimated date. Target date funds generally shift to a more conservative investment mix over time. While this may help to manage risk, it does not guarantee earnings growth, nor is the fund’s principal value guaranteed at any time, including at the target date. Investors do not have the ability to actively manage the investments within target date funds. The portfolio managers control security selection and asset allocation. Target date funds allocate their investments among multiple asset classes, which can include U.S. and foreign equity and fixed-income securities.

Glidepath – The glidepath refers to a formula that defines the asset allocation mix of a target date fund, based on the number of years to the target date. The glidepath creates an asset allocation that becomes more conservative (i.e., includes more fixed-income assets and fewer equities) the closer a fund gets to the target date.

This article is for educational purposes only and may not be redistributed by the recipient without prior written consent from New York Life Investment Management LLC. This communication is not intended to be an offer or solicitation of investment advisory services or products.
Neither New York Life nor its agents or affiliates provide tax, legal, investment, or accounting advice. Plan sponsors should speak to their own tax, legal, or investment advisor or accounting professional regarding their specific situation.
The information contained herein is general in nature and is provided solely for educational and informational purposes.

All investments are subject to market risk, including possible loss of principal. Diversification cannot assure a profit or protect against loss in a declining market.

Opinions expressed are current opinions as of the date appearing in this material only. The information and opinions contained herein are for general information use only. MainStay Investments does not guarantee their accuracy or completeness, nor does MainStay Investments assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. There can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Past performance is no guarantee of future results.

MainStay Investments® is a registered service mark and name under which New York Life Investment Management LLC does business. MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. The MainStay Funds® are managed by New York Life Investment Management LLC and distributed by NYLIFE Distributors LLC, 30 Hudson Street, Jersey City, NJ 07302, a wholly owned subsidiary of New York Life Insurance Company. NYLIFE Distributors LLC is a Member FINRA/SIPC

Prepared for an Institutional Audience.


Jeffrey Zielinski, CRPC®, CRPS®

DCIO National Account Senior Associate, New York Life Investments

Jeffrey Zielinski is a DCIO National Account Senior Associate helping cover our home office and field relationships. He joined New York Life Investments in 2016. Previously, Jeff’s experience includes John Hancock RPS (Formerly New York Life RPS), ADP Retirement Services, and

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  1. You indicated a couple will need $275,000 on average for medical costs in retirement. I assume you are talking total costs: In other words it would be a TOTAL COST including out-of-pocket cash expenses along with your medicare supplement plan benefits or medicare advantage plan benefits. Are prescription drugs a major factor in determining the need for $275,000?

  2. Thanks for your question! The estimate is based on a hypothetical couple retiring in 2017, 65 years old, with life expectancies that align with Society of Actuaries’ RP-2014 Healthy Annuitant rates with Mortality Improvements Scale MP-2016. Estimates are calculated for “average” retirees, but may be more or less depending on actual health status, area of residence, and longevity. Estimate is net of taxes. The Fidelity Retiree Health Care Costs Estimate assumes individuals do not have employer-provided retiree health care coverage, but do qualify for the federal government’s insurance program, Original Medicare. The calculation takes into account cost-sharing provisions (such as deductibles and coinsurance) associated with Medicare Part A and Part B (inpatient and outpatient medical insurance). It also considers Medicare Part D (prescription drug coverage) premiums and out-of-pocket costs, as well as certain services excluded by Original Medicare. The estimate does not include other health-related expenses, such as over-the-counter medications, most dental services, and long-term care. Life expectancies based on research and analysis by Fidelity Investments Benefits Consulting group and data from the Society of Actuaries, 2014.

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