BlackRock CEO Larry Fink warns there could be a looming retirement crisis for younger generations if Baby Boomers don't help them save enough for retirement. Retirement Daily Robert Powell joins Yahoo Finance to weigh in on Fink's comments and the state of retirement in America.
Powell flags necessary first steps for potential early retirees: "First and foremost, have you crunched the numbers to really understand whether your assets will last 60 years of retirement or will you have to decrease your standard of living in retirement? Also, if you retire before age 65, you'll likely have to buy health insurance if you're pre-medicare, so that's an additional cost. So if you haven't crunched the numbers, what I suggest is get help, get a second opinion, and consider using a financial adviser if you go down this path who can use a series of retirement readiness tests."
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BRAD SMITH: Having enough money to retire is a big issue for a lot of Americans. BlackRock CEO Larry Fink has entered the debate warning of a looming retirement crisis, that's if boomers don't help younger generations save enough for their futures. Fink issuing the call in his annual chair letter saying, "America needs an organized, high-level effort to ensure that future generations can live out their final years with dignity."
So why is preparing for retirement important? Well, 2024 is a big year for retirement in the US. More than 11,000 people are turning 65 every day this year, that's according to a report from the Alliance for Lifetime Income. But you might be able to retire early without hitting that milestone.
To break down what you need to know, Robert Powell, Retirement Daily editor is here with us. Robert, great to speak with you, great to see you here. First and foremost, you hear the call from Larry Fink and what he's trying to do to ensure that future generations have the same type of access to retirement. What needs to happen right now?
ROBERT POWELL: Well, I think a couple of things. One, is we have to look at the demographics. Folks who are in the highest income quintiles don't have a crises. Folks in the lowest income quintiles don't have a crises.
It's really the people in the middle who have to struggle for saving for college and saving for retirement at the same time. For them to make ends meet, they need to make a dedicated effort to save as much as possible for their retirement to ensure that they have the desired standard of living once they retire. And I think that's critical. You can always take out loans to pay for your child's college education, you can't take out a loan to pay for your retirement.
BRAD SMITH: And so with that in mind, how do people decide whether or not early retirement is right for them? What are you typically hearing as people are making those decisions?
ROBERT POWELL: So Brad, I look at it in a couple three ways. First and foremost, look at longevity. If you retire at age 60, you might have to fund 40 years of retirement. If you retire at age 50, you might have to fund 50 years of retirement. If you retire at age 40, that's 60 years of retirement that you have to fund.
So first and foremost, have you crunched the numbers to really understand whether your assets will last 60 years of retirement or will you have to decrease your standard of living in retirement? Also, if you retire before age 65, you'll likely have to buy health insurance if you're pre-Medicare. So that's an additional cost.
So if you haven't crunched the numbers, what I suggest is get help, get a second opinion. And consider using a financial advisor if you go down this path who can use a series of retirement readiness tests. Many advisors just use something called the Monte Carlo test, which is a statistical analysis that will tell you you have a 70%, 80%, 90% chance of meeting your retirement goals. But it also conversely means that you have a 10%, or 20%, or 30% chance of not meeting your retirement goals.
So in addition to Monte Carlo, I would suggest that people ask their advisor to give them what's called a fundedness calculation, which is very similar to what pension plans use to determine if they're overfunded or not. And then the last thing would be to add another test called backtesting where you're looking at would my portfolio have-- would I have been able to withdraw, say, 4% per year over the past 30 years in these market conditions? So use a series of three tests.
By the way, most financial advisors and most off-the-shelf retirement software calculators just use Monte Carlo. So don't settle for Monte Carlo because it's not going to give you necessarily an accurate picture. I would prefer that people triangulate around these three measures. And if all of them are green lights, then I'd say you can afford your early retirement.
And then the other thing is not only should you do these three retirement tests, but you should stress test them and make sure that you're looking at best case, probable case, and worst case outcomes. Because the last thing you want to do is retire and then think, oh, I've made a mistake. And then, Brad, the last thing I'll mention before we move on is in retirement, you're going to face at least 15, maybe even more retirement risks. There's a risk of outliving your assets, which we've discussed, there's a risk of inflation, there's stock market volatility, or what sometimes people refer to as sequence of return risk.
There's interest rate risk, there's public policy risk, perhaps taxes go up. There may be unexpected health care shocks that you'll face, there may be a death, or a divorce, or remarriage, or there may be changing housing needs. And what you really need to think about if you're going to retire early is, have I managed and mitigated all the risks that I might face in retirement and to understand that there will be different tools to manage those different risks?
So for instance with longevity, the notion that you might outlive your assets, an annuity is perhaps the best tool to manage that risk. But with inflation, stocks may be the best tool to manage the risk of dealing with inflation. So don't just think that one tool can satisfy, or mitigate, or manage all these retirement risks you might face.
