Background: Whether participants choose to implement their own self-directed retirement strategy or partner with an advice provider, there are pathways to a

successful retirement. Self-directed participants who save consistently and diligently, invest wisely with a thoughtfully constructed target date fund, and exercise prudence in spending during retirement stand an excellent chance of a successful retirement. Most target date investments are constructed with a generalized participant demographic in mind. Baseline assumptions include savings rate, retirement age, salary, wage growth, retirement income needs, and risk aversion. In this Research Minute, we analyze ways that advice can add value for participants who fall outside these norms. Specifically, we examine the value of advice for two disparate populations:

Participants who save well and spend below their means.

Participants who choose not to save well and spend more than they should.

Findings: With Vanguard’s baseline savings and spending assumptions, a self-directed investor has a 92% probability of success (meeting or exceeding a 79% income replacement ratio) with the Vanguard Target Retirement Fund glidepath. Personalized advice can add value for participants with saving and spending behaviors different from baseline assumptions.

Hypothetical “Participant A” saves more than the baseline participant over their working career and has a lower income replacement ratio goal in retirement. Even though this participant is well on track, advice can still improve outcomes through three potential interventions:

A personalized investment glidepath with lower equity exposure relative to the target date glidepath can achieve an equally high probability of success while also lessening portfolio return volatility and downside risk.

Advisor guidance can help evaluate the tradeoffs between the participant’s legacy and spending goals, potentially leading to an enhanced retirement lifestyle.

Advisor guidance can improve participant satisfaction by illustrating an earlier retirement option while maintaining a high probability of success.

Hypothetical “Participant B” saves less than the baseline participant over their working years and has a higher retirement spending goal. Advice can improve this participant’s probability of meeting their retirement income needs through the following interventions:

Advisor coaching to increase saving results in higher wealth accumulation at retirement and improves the participant’s probability of success.

Advisor coaching to lower the participant’s post-retirement spending goal can significantly slow wealth depletion during the decumulation phase.

Postponing retirement and the claiming of Social Security by five years increases lifetime savings and the expected Social Security benefit, as well as shortens the time over which portfolio savings must support spending needs.Bottom line: Participants may face an assortment of challenges to meeting their retirement goals. Whether they are on or off track, they can benefit from guidance on portfolio construction, goal setting, and financial planning.

Insights shared by guest contributors are their own and do not represent the views of DCIIA or the RRC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Disclaimer:

All investing is subject to risk, including the possible loss of the money you invest. Investments in target date funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in target date funds is not guaranteed at any time, including on or after the target date. Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor, or by Vanguard National Trust Company, a federally chartered, limited-purpose trust company.