Retirement Savings: ‘I Have $1 Million In My 401(k), Do I Have Enough?’

“I have $1 million in my 401(k), do I have enough to retire?” That’s typically what most savers ask themselves. But it’s not the right retirement savings question to ask.

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A better one is: “How much per year is that in income?” said Nick Nefouse, head of retirement solutions at BlackRock (BLK), the world’s largest asset manager.

But coming up with that income number based on your account balance alone won’t tell the whole story. Once you say goodbye to a paycheck for good, it’s all about how much total income you can generate from all sources. Fortunately, there are other money levers you can pull and tweaks you can make to your financial plan to boost the amount of money you can spend in retirement.

Three-Legged Retirement Savings Stool Is Gone

Only 15% of workers have access to a traditional pension, or defined benefit plan. That means the so-called “three-legged stool” for retirement savings has been disrupted. Most workers are essentially down to two income sources in retirement: Social Security and personal savings.

The good news? If you worry about outliving your money or having to skimp on spending when you stop working, there are strategies you can employ to boost your spending power in retirement, according to new research from BlackRock and the Bipartisan Policy Center, a Washington-based think tank.

“I’ve never liked the narrative that you can’t fix it,” said Nefouse. “There are choices that you can make that can make retirement much better.”

Retirement Savings Is More Than Your 401(k)

Focusing just on your 401(k) or IRA balance when taking stock of your retirement security is shortsighted. Instead, you should analyze your “whole portfolio.” You should consider other assets besides the size of your account balances, Nefouse says.

“It’s not just your financial assets,” said Nefouse. “It’s also things like Social Security (and when you start taking it). What if I save a little bit more? Or retire a year or two later? Or add a guaranteed income stream? That’s a different thinking process than just accumulating assets.”

BlackRock emphasizes taking a broader approach to generating income. To do this, you need to take advantage of multiple potential income sources and strategies to diversify and increase your income stream when you retire.

The key is to overcome risks to your nest egg such as longevity, market volatility, and costs related to declining health.

Add A Guaranteed Lifetime Stream

The first step to broadening retirement income is a guaranteed lifetime stream. This is a way to bring back the third leg in the three-legged stool, says Nefouse. The objective? Get a third of your retirement income from Social Security, a third from a guaranteed income option and a third from your own savings.

How do you do it? By the time you reach retirement, you should have roughly 30% of your retirement savings portfolio sitting in a guaranteed income option, such as an annuity, Nefouse says. So, if you’ve got a $1 million 401(k), you should have $300,000 in guaranteed income options by the time you stop working. The other 70% of your portfolio should remain liquid and have an opportunity to grow.

Ideally, you will start shifting retirement funds into a guaranteed income option in the years leading up to retirement. One way to do it is to layer the funds in over time. Buy an annuity, say, every year for five or 10 years before you retire. “It’s just like dollar-cost averaging,” said Nefouse. This strategy helps smooth out the different interest rates you will receive on the income products, said Nefouse.

The combination of your Social Security benefit and the income you generate from your guaranteed income option should cover your essential spending in retirement, Nefouse says.

Currently, fewer than 10% of employer-sponsored plans offer in-plan options that convert fixed sum savings to stable lifetime income, according to BlackRock. But if one is offered to you, it’s something to consider. Nefouse expects the number of plans that offer this option to increase. “(It is) the future of how people (will) create retirement income,” said Nefouse.

Boost Allocation To Stocks

Even a small upward adjustment in the risk profile of your asset allocation (upping your stock weighting to 50% from 40%, for instance) can make a big difference to overall spending in retirement, the BlackRock research found.

For an average worker aged 65, going with a tad more aggressive asset allocation coupled with adding a guaranteed lifetime income component to a portfolio could result in nearly 30% more annual spending from your savings alone, according to the BlackRock research paper “Paving the Way to Optimized Retirement Income.” Historically, stocks have generated larger returns than bonds and cash over longer time periods.

Delay Claiming Social Security

Another lever to pull is to delay taking Social Security as long as possible. The reason: The longer you wait to take benefits, the larger your benefit will be.

Optimizing Social Security income is a key part of enhancing retirement outcomes. “I don’t think people are aware of the reduction in benefits they’re taking by taking Social Security early,” Nefouse said. Social Security benefits will be reduced by 30% for a person who retires at 62 whose full retirement age is 67, according to the Social Security Administration.

Even delaying taking your benefits for two years, from age 65 to 67, can make a difference to your retirement spending, according to BlackRock.

Retiring later, of course, is another way to give your assets more time to grow and a shorter retirement period to fund, the BlackRock study noted.

“Taken together, these strategies have the potential to extend retirement spending power well beyond the average person’s life span, providing a higher ‘spending floor’ into a retiree’s 90s and beyond,” the BlackRock research concluded.