J.P. Morgan Asset Management recently released its fourth Guide to Retirement, which Katherine Roy, its chief retirement strategist, described as an “across-the-table” piece that advisors can use when meeting with clients.
We reviewed the guide and attended a lunch with Roy and Anne Lester, Global Head of Retirement Solutions, and thought the following points were important for advisors to keep top of mind.
Lower Expected Returns Mean Saving More or Spending Less
Lester joked that “6 is the new 8,” referring to the expected annual returns that advisors and investors can expect in a model balanced portfolio. That’s about 1.5% to 2% lower than expectations a decade ago and about 1% lower than the 7% annual return that advisors historically use, said Roy.
Given this weaker outlook, investors will need to save more in order to have enough funds to retire comfortably, and once in retirement, spend a little less, said Lester. The expected return for those already retired is 5% because those investors will likely keep more cash on hand.
Managing Income Taxes Becomes More Important
With lower returns limiting the growth of retirement savings, managing the tax liabilities of retirement becomes crucial, according to J.P. Morgan Asset Management. Taxes must be paid when assets are withdrawn from tax-deferred accounts and the resulting shrinkage can be very dramatic. That tax bill “is often investors’ biggest surprise,” said Roy.
A tax-deferred account like a 401(k) or rollover IRA worth $505,941, for example, shrinks almost $50,000 for those in the 5% tax bracket but more than $100,000 for account holders in the 33% tax bracket. “We are encouraging advisors to put this chart before every client they talk to,” said Roy.
”Individual investors have been receiving statements that might have been telling them that their IRA was worth $505,941 and that’s really where the client is anchored,” said Roy. “What they have forgotten is that for 35 years they haven’t paid any tax on that account … The tax man is coming.”
She noted that the tax bite is even larger in states with high income taxes such as California (top rate is 13.3%) and Oregon (9.9%). Are Your Clients Saving Enough for Retirement?
The most popular slide in the retirement guide is the Retirement Savings Checkpoints chart, which illustrates how much advisors’ clients should have already saved, based on their ages and income, to support their current lifestyle in retirement.
The chart assumes a 5% annual contribution to a retirement account with an annual return of 6.5% before retirement and 5% thereafter, a 30-year retirement starting at age 65 and 2.2% inflation rate.