Around the world, individuals are being asked to take on greater responsibility for their own retirement. In the US, for example, a combination of limited Social Security funding and a reduction in the number of defined benefit (DB) employer plans—historically, the primary retirement savings vehicle for many—is causing investors to make decisions they have never had to face about how to save for retirement.
Many workers are disengaged from retirement planning during the early parts of their work life. They know they should be saving for retirement, but they have less clarity on what that really means. Often, they don’t know how to set a realistic goal or how to get there.
Over the past two decades, the shift toward defined contribution (DC) plans as the primary vehicle for retirement savings has compounded this challenge. While DB plans and Social Security benefits are typically communicated in terms of expected income during retirement—language participants can easily comprehend—DC plans often look at account accumulation, an overall number that means little to the average person trying to understand how much he or she needs to save for retirement.
So, what represents a good retirement income? No matter who is asking, I always give the same response: “An inflation-protected income that allows you to sustain the standard of living you enjoyed in the latter part of your working life throughout the rest of your life.” That is what you should be striving for with a retirement plan.
One of the best ways to ensure you can support an expected standard of living in retirement? Save early, save more, and monitor your progress.
Of course, every plan needs a reality check; a good design also must be feasible. If your goal seems out of reach, keep in mind these four ways to truly improve the probability of a good retirement:
1. SAVE MORE.
Ultimately, this means lowering your lifetime spending level, and likely, your standard of living. While it’s relatively simple in theory, it may be more complicated in practice.
2. WORK LONGER.
Opting to work longer can help in two ways. First, you may have the opportunity to save more. Second, you will have a shorter retirement period to support.
3. TAKE MORE RISKS.
With less infringement on your current lifestyle, taking on more investment risk may seem like the way to go. But it’s important to have a backup plan. Don’t count on higher returns being a sure thing. Risk is real, and if taking risks is part of a solution, then one must be prepared for what to do if the risk is realized by, say, a big decline in stocks during retirement.
4. MAKE THE MOST OUT OF ASSETS AVAILABLE AT RETIREMENT.
While the above strategies are driven by creating more assets, this fourth is about getting the most benefit from the assets you have at retirement time. By making an investment in an annuity instead of a bond, for example, you can “purchase” a larger set income for the rest of your life in return for giving up that income when you no longer need it.
Despite the fundamental shift over the past two decades in how people save for retirement, research shows that one of the best ways you can support an expected standard of living in retirement remains the same: Save early in your career, save more as your annual income increases, and build a framework to monitor your progress.
Robert C. Merton is Distinguished Professor of Finance at MIT’s Sloan School of Management and University Professor Emeritus at Harvard University. He received the Nobel Prize in Economic Sciences in 1997 for developing a new method to determine the value of derivatives. He is Resident Scientist at Dimensional Holdings Inc.
Robert Merton provides consulting services to Dimensional Fund Advisors LP.
This material is in relation to the US market and contains analysis specific to the US. The information above is for informationalpurposes only and does not constitute accounting, financial, legal or tax advice. Please seek independent professional advicewhere you consider necessary.
The information in this material is intended for the recipient’s background information and use only. It is provided in good faith and without any warranty or representation as to accuracy or completeness. Information and opinions presented in this material have been obtained or derived from sources believed by Dimensional to be reliable and Dimensional has reasonable grounds to believe that all factual information herein is true as at the date of this material. It does not constitute investment advice, recommendation,or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision. It is the responsibility of any persons wishing to make a purchase to inform themselves of and observe all applicable laws and regulations. Unauthorised reproduction or transmitting of this material is strictly prohibited. Dimensional accepts no responsibility for loss arising from the use of the information contained herein.
“Dimensional” refers to the Dimensional separate but affiliated entities generally, rather than to one particular entity. These entities are Dimensional Fund Advisors LP, Dimensional Fund Advisors Ltd., Dimensional Ireland Limited, DFA Australia Limited, Dimensional Fund Advisors Canada ULC, Dimensional Fund Advisors Pte. Ltd, Dimensional Japan Ltd. and Dimensional HongKong Limited. Dimensional Hong Kong Limited is licensed by the Securities and Futures Commission to conduct Type 1 (dealing in securities) regulated activities only and does not provide asset management services.
Risks Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Pastperformance is not a guarantee of future results. There is no guarantee strategies will be successful.
UNITED STATES Dimensional Fund Advisors LP is an investment advisor registered with the Securities and ExchangeCommission. Investment products: • Not FDIC Insured • Not Bank Guaranteed • May Lose Value
Dimensional Fund Advisors does not have any bank affiliates.
CANADA These materials have been prepared by Dimensional Fund Advisors Canada ULC. The other Dimensional entities referenced hereinare not registered resident investment fund managers or portfolio managers in Canada.
Commissions, trailing commissions, management fees, and expenses all may be associated with mutual fund investments.Please read the prospectus before investing. Unless otherwise noted, any indicated total rates of return reflect the historical annual compounded total returns including changes in share or unit value and reinvestment of all dividends or other distributions and do not take into account sales, redemption, distribution, or optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated.
AUSTRALIA and NEW ZEALAND This material is issued by DFA Australia Limited (AFS License No. 238093, ABN 46 065 937 671). This material is provided for information only. No account has been taken of the objectives, financial situation or needs of any particular person. Accordingly, to the extent this material constitutes general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. Investors should also consider the Product Disclosure Statement (PDS) and the target market determination (TMD) that has been made for each financial product either issued or distributed by DFA Australia Limited prior to acquiring or continuing to hold any investment. Goto au.dimensional.com/funds to access a copy of the PDS or the relevant TMD. Any opinions expressed in this material reflect our judgement at the date of publication and are subject to change.
WHERE ISSUED BY DIMENSIONAL IRELAND LIMITED Issued by Dimensional Ireland Limited (Dimensional Ireland), with registered office 10 Earlsfort Terrace, Dublin 2, D02 T380, Ireland. Dimensional Ireland is regulated by the Central Bank of Ireland (Registration No. C185067).
Dimensional Ireland does not give financial advice. You are responsible for deciding whether an investment is suitable for your personal circumstances, and we recommend that a financial adviser helps you with that decision.
Dimensional Ireland issues information and materials in English and may also issue information and materials in certain other languages. The recipient’s continued acceptance of information and materials from Dimensional Ireland will constitute the recipient’s consent to be provided with such information and materials, where relevant, in more than one language.
WHERE ISSUED BY DIMENSIONAL FUND ADVISORS LTD. Issued by Dimensional Fund Advisors Ltd. (Dimensional UK), 20 Triton Street, Regent’s Place, London, NW1 3BF. DimensionalUK is authorised and regulated by the Financial Conduct Authority (FCA) – Firm Reference No. 150100.
Dimensional UK does not give financial advice. You are responsible for deciding whether an investment is suitable for your personal circumstances, and we recommend that a financial adviser helps you with that decision.
Dimensional UK issues information and materials in English and may also issue information and materials in certain other languages. The recipient’s continued acceptance of information and materials from Dimensional UK will constitute the recipient’s consent to be provided with such information and materials, where relevant, in more than one language.
NOTICE TO INVESTORS IN SWITZERLAND: This is advertising material.
JAPAN For Institutional Investors and Registered Financial Instruments Intermediary Service Providers.
This material is deemed to be issued by Dimensional Japan Ltd., which is regulated by the Financial Services Agency of Japan and is registered as a Financial Instruments Firm conducting Investment Management Business and Investment Advisory andAgency Business.
Dimensional Japan Ltd. Director of Kanto Local Finance Bureau (FIBO) No. 2683 Membership: Japan Investment Advisers Association
SINGAPORE This document is deemed to be issued by Dimensional Fund Advisors Pte. Ltd., which is regulated by the Monetary Authorityof Singapore and holds a capital markets services license for fund management.
This advertisement has not been reviewed by the Monetary Authority of Singapore. This information should not be considered investment advice or an offer of any security for sale. All information is given in good faith without any warranty and is not intended to provide professional, investment or any other type of advice or recommendation and does not take into account the particular investment objectives, financial situation or needs of individual recipients. Before acting on any information in this document, you should consider whether it is suitable for your particular circumstances and, if appropriate, seek professional advice.Dimensional Fund Advisors Pte. Ltd. does not accept any responsibility and cannot be held liable for any person’s use of or reliance on the information and opinions contained herein. Neither Dimensional Fund Advisors Pte. Ltd. nor its affiliates shall be responsible or held responsible for any content prepared by financial advisors.
FOR PROFESSIONAL INVESTORS IN HONG KONG This document is deemed to be issued by Dimensional Hong Kong Limited (CE No. BJE760) (“Dimensional Hong Kong”), whichis licensed by the Securities and Futures Commission to conduct Type 1 (dealing in securities) regulated activities only and does not provide asset management services.
This document should only be provided to “professional investors” (as defined in the Securities and Futures Ordinance [Chapter 571 of the Laws of Hong Kong] and its subsidiary legislation) and is not for use with the public. This document is not directed to any person in any jurisdiction where (by reason of that person’s nationality, residence, or otherwise) the publication or availability of this document are prohibited or which would subject Dimensional Hong Kong (including its affiliates) or any of Dimensional HongKong’s products or services to any registration, licensing, or other such legal requirements within such jurisdiction or country. Whenprovided to prospective investors, this document forms part of, and must be provided together with, applicable fund offering materials. This document must not be provided to prospective investors on a standalone basis. Before acting on any information in this document, you should consider whether it is suitable for your particular circumstances and, if appropriate, seek professional advice.
Unauthorized copying, reproducing, duplicating, or transmitting of this material are prohibited. This document and the distribution of this document are not intended to constitute and do not constitute an offer or an invitation to offer to the Hong Kong public toacquire, dispose of, subscribe for, or underwrite any securities, structured products, or related financial products or instruments nor investment advice thereto. Any opinions and views expressed herein are subject to change. Neither Dimensional Hong Kong nor its affiliates shall be responsible or held responsible for any content prepared by financial advisors. Financial advisors in Hong Kong shall not actively market the services of Dimensional Hong Kong or its affiliates to the Hong Kong public.
Four Ways to Improve the Probability of a Good Retirement
Around the world, individuals are being asked to take on greater responsibility for their own retirement. In the US, for example, a combination of limited Social Security funding and a reduction in the number of defined benefit (DB) employer plans—historically, the primary retirement savings vehicle for many—is causing investors to make decisions they have never had to face about how to save for retirement.
Many workers are disengaged from retirement planning during the early parts of their work life. They know they should be saving for retirement, but they have less clarity on what that really means. Often, they don’t know how to set a realistic goal or how to get there.
Over the past two decades, the shift toward defined contribution (DC) plans as the primary vehicle for retirement savings has compounded this challenge. While DB plans and Social Security benefits are typically communicated in terms of expected income during retirement—language participants can easily comprehend—DC plans often look at account accumulation, an overall number that means little to the average person trying to understand how much he or she needs to save for retirement.
So, what represents a good retirement income? No matter who is asking, I always give the same response: “An inflation-protected income that allows you to sustain the standard of living you enjoyed in the latter part of your working life throughout the rest of your life.” That is what you should be striving for with a retirement plan.
Of course, every plan needs a reality check; a good design also must be feasible. If your goal seems out of reach, keep in mind these four ways to truly improve the probability of a good retirement:
1. SAVE MORE.
Ultimately, this means lowering your lifetime spending level, and likely, your standard of living. While it’s relatively simple in theory, it may be more complicated in practice.
2. WORK LONGER.
Opting to work longer can help in two ways. First, you may have the opportunity to save more. Second, you will have a shorter retirement period to support.
3. TAKE MORE RISKS.
With less infringement on your current lifestyle, taking on more investment risk may seem like the way to go. But it’s important to have a backup plan. Don’t count on higher returns being a sure thing. Risk is real, and if taking risks is part of a solution, then one must be prepared for what to do if the risk is realized by, say, a big decline in stocks during retirement.
4. MAKE THE MOST OUT OF ASSETS AVAILABLE AT RETIREMENT.
While the above strategies are driven by creating more assets, this fourth is about getting the most benefit from the assets you have at retirement time. By making an investment in an annuity instead of a bond, for example, you can “purchase” a larger set income for the rest of your life in return for giving up that income when you no longer need it.
Despite the fundamental shift over the past two decades in how people save for retirement, research shows that one of the best ways you can support an expected standard of living in retirement remains the same: Save early in your career, save more as your annual income increases, and build a framework to monitor your progress.
Robert C. Merton is Distinguished Professor of Finance at MIT’s Sloan School of Management and University Professor Emeritus at Harvard University. He received the Nobel Prize in Economic Sciences in 1997 for developing a new method to determine the value of derivatives. He is Resident Scientist at Dimensional Holdings Inc.
LEARN MORE
Dimensional Resident Scientist Receives PSCA Lifetime Achievement Award
Researching Retirement:The Impact of Inflation, Interest Rates, and Market Risks
Robert Merton provides consulting services to Dimensional Fund Advisors LP.
This material is in relation to the US market and contains analysis specific to the US. The information above is for informationalpurposes only and does not constitute accounting, financial, legal or tax advice. Please seek independent professional advicewhere you consider necessary.
The information in this material is intended for the recipient’s background information and use only. It is provided in good faith and without any warranty or representation as to accuracy or completeness. Information and opinions presented in this material have been obtained or derived from sources believed by Dimensional to be reliable and Dimensional has reasonable grounds to believe that all factual information herein is true as at the date of this material. It does not constitute investment advice, recommendation,or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision. It is the responsibility of any persons wishing to make a purchase to inform themselves of and observe all applicable laws and regulations. Unauthorised reproduction or transmitting of this material is strictly prohibited. Dimensional accepts no responsibility for loss arising from the use of the information contained herein.
“Dimensional” refers to the Dimensional separate but affiliated entities generally, rather than to one particular entity. These entities are Dimensional Fund Advisors LP, Dimensional Fund Advisors Ltd., Dimensional Ireland Limited, DFA Australia Limited, Dimensional Fund Advisors Canada ULC, Dimensional Fund Advisors Pte. Ltd, Dimensional Japan Ltd. and Dimensional HongKong Limited. Dimensional Hong Kong Limited is licensed by the Securities and Futures Commission to conduct Type 1 (dealing in securities) regulated activities only and does not provide asset management services.
Risks
Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Pastperformance is not a guarantee of future results. There is no guarantee strategies will be successful.
UNITED STATES
Dimensional Fund Advisors LP is an investment advisor registered with the Securities and ExchangeCommission. Investment products: • Not FDIC Insured • Not Bank Guaranteed • May Lose Value
Dimensional Fund Advisors does not have any bank affiliates.
CANADA
These materials have been prepared by Dimensional Fund Advisors Canada ULC. The other Dimensional entities referenced hereinare not registered resident investment fund managers or portfolio managers in Canada.
Commissions, trailing commissions, management fees, and expenses all may be associated with mutual fund investments.Please read the prospectus before investing. Unless otherwise noted, any indicated total rates of return reflect the historical annual compounded total returns including changes in share or unit value and reinvestment of all dividends or other distributions and do not take into account sales, redemption, distribution, or optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated.
AUSTRALIA and NEW ZEALAND
This material is issued by DFA Australia Limited (AFS License No. 238093, ABN 46 065 937 671). This material is provided for information only. No account has been taken of the objectives, financial situation or needs of any particular person. Accordingly, to the extent this material constitutes general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. Investors should also consider the Product Disclosure Statement (PDS) and the target market determination (TMD) that has been made for each financial product either issued or distributed by DFA Australia Limited prior to acquiring or continuing to hold any investment. Goto au.dimensional.com/funds to access a copy of the PDS or the relevant TMD. Any opinions expressed in this material reflect our judgement at the date of publication and are subject to change.
WHERE ISSUED BY DIMENSIONAL IRELAND LIMITED
Issued by Dimensional Ireland Limited (Dimensional Ireland), with registered office 10 Earlsfort Terrace, Dublin 2, D02 T380, Ireland. Dimensional Ireland is regulated by the Central Bank of Ireland (Registration No. C185067).
Dimensional Ireland does not give financial advice. You are responsible for deciding whether an investment is suitable for your personal circumstances, and we recommend that a financial adviser helps you with that decision.
Dimensional Ireland issues information and materials in English and may also issue information and materials in certain other languages. The recipient’s continued acceptance of information and materials from Dimensional Ireland will constitute the recipient’s consent to be provided with such information and materials, where relevant, in more than one language.
WHERE ISSUED BY DIMENSIONAL FUND ADVISORS LTD.
Issued by Dimensional Fund Advisors Ltd. (Dimensional UK), 20 Triton Street, Regent’s Place, London, NW1 3BF. DimensionalUK is authorised and regulated by the Financial Conduct Authority (FCA) – Firm Reference No. 150100.
Dimensional UK does not give financial advice. You are responsible for deciding whether an investment is suitable for your personal circumstances, and we recommend that a financial adviser helps you with that decision.
Dimensional UK issues information and materials in English and may also issue information and materials in certain other languages. The recipient’s continued acceptance of information and materials from Dimensional UK will constitute the recipient’s consent to be provided with such information and materials, where relevant, in more than one language.
NOTICE TO INVESTORS IN SWITZERLAND: This is advertising material.
JAPAN
For Institutional Investors and Registered Financial Instruments Intermediary Service Providers.
This material is deemed to be issued by Dimensional Japan Ltd., which is regulated by the Financial Services Agency of Japan and is registered as a Financial Instruments Firm conducting Investment Management Business and Investment Advisory andAgency Business.
Dimensional Japan Ltd.
Director of Kanto Local Finance Bureau (FIBO) No. 2683 Membership: Japan Investment Advisers Association
SINGAPORE
This document is deemed to be issued by Dimensional Fund Advisors Pte. Ltd., which is regulated by the Monetary Authorityof Singapore and holds a capital markets services license for fund management.
This advertisement has not been reviewed by the Monetary Authority of Singapore. This information should not be considered investment advice or an offer of any security for sale. All information is given in good faith without any warranty and is not intended to provide professional, investment or any other type of advice or recommendation and does not take into account the particular investment objectives, financial situation or needs of individual recipients. Before acting on any information in this document, you should consider whether it is suitable for your particular circumstances and, if appropriate, seek professional advice.Dimensional Fund Advisors Pte. Ltd. does not accept any responsibility and cannot be held liable for any person’s use of or reliance on the information and opinions contained herein. Neither Dimensional Fund Advisors Pte. Ltd. nor its affiliates shall be responsible or held responsible for any content prepared by financial advisors.
FOR PROFESSIONAL INVESTORS IN HONG KONG
This document is deemed to be issued by Dimensional Hong Kong Limited (CE No. BJE760) (“Dimensional Hong Kong”), whichis licensed by the Securities and Futures Commission to conduct Type 1 (dealing in securities) regulated activities only and does not provide asset management services.
This document should only be provided to “professional investors” (as defined in the Securities and Futures Ordinance [Chapter 571 of the Laws of Hong Kong] and its subsidiary legislation) and is not for use with the public. This document is not directed to any person in any jurisdiction where (by reason of that person’s nationality, residence, or otherwise) the publication or availability of this document are prohibited or which would subject Dimensional Hong Kong (including its affiliates) or any of Dimensional HongKong’s products or services to any registration, licensing, or other such legal requirements within such jurisdiction or country. Whenprovided to prospective investors, this document forms part of, and must be provided together with, applicable fund offering materials. This document must not be provided to prospective investors on a standalone basis. Before acting on any information in this document, you should consider whether it is suitable for your particular circumstances and, if appropriate, seek professional advice.
Unauthorized copying, reproducing, duplicating, or transmitting of this material are prohibited. This document and the distribution of this document are not intended to constitute and do not constitute an offer or an invitation to offer to the Hong Kong public toacquire, dispose of, subscribe for, or underwrite any securities, structured products, or related financial products or instruments nor investment advice thereto. Any opinions and views expressed herein are subject to change. Neither Dimensional Hong Kong nor its affiliates shall be responsible or held responsible for any content prepared by financial advisors. Financial advisors in Hong Kong shall not actively market the services of Dimensional Hong Kong or its affiliates to the Hong Kong public.
05/23/2022
https://my.dimensional.com/four-ways-to-improve-the-probability-of-a-good-retirement
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