In times of economic uncertainty — like the pandemic — one expert’s financial guidance when it comes to retirement planning is simple.
“For individuals who can save for retirement, my advice is to save more,” David Blanchett, head of retirement research at Morningstar, told Yahoo Finance.
Blanchett acknowledged that it might sound a “little crazy,” but considering yields on government bonds are at a paltry 50 basis points — or 0.5% interest — with no indication of how long that will persist, putting more in your 401(k) is the best way to save given the circumstances.
The stock markets can never guarantee high returns, which is why Blanchett suggested to depend on low-cost financial tools like 401(k)s and targeted funds.
Guaranteed fixed income
For retirees who want more guaranteed income, “the best place to start is usually just delaying Social Security,” he said. A second option is annuities.
“Annuities is kind of a dirty word. People have very different perceptions on annuities,” he said. But “If you’re someone that likes safety annuities are actually a much better yield today than they were, say, three or four years ago.”
The value of buying an annuity increases when interest rates are lower, he said. So, a retiree who wants to invest in fixed income can earn 3% to 4% on an annuity, compared with just 0.5% or 1% on a bond.
How much to save?
The million-dollar question tends to be ‘how much do I need for retirement,’ but there isn’t a magic number that suits everyone’s individual needs. Blanchett considered saving at least 15% of your pay, including employer contributions, a “decent rule of thumb.”
But Blanchett couched his advice with the caveat that the numbers used to determine a portfolio are based on long-term historical averages rather than the present. If today’s rates end up being more permanent than temporary, the definition of retirement success is bound to change.