Retirement's 'Magic Number' Soaring: Can ETFs Help?

Workers have saved little for their retirements, while also believing they will need more.

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Reviewed by: James Rubin
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Edited by: Ron Day

The last thing financial advisors and their clients want is for retirement to be an illusion.

That’s frankly the advisor’s number one job in many cases: “get me to retirement and keep me there.” That means the advisor must determine a target wealth level for each client to live their ideal retirement life (financially speaking), or at least an acceptable one if their career, markets, or the unexpected tries to derail their best laid plans. 

But there’s a disruptive force threatening to make this effort more difficult. It has more to do with expectations. But in this industry, expectations might as well be reality.

Advisors know that what clients want is what they initially confront in early-stage discussions. What the client needs, rather than simply wants, is ultimately what they agree on via a plan.

But what happens when the needs accelerate faster than the advisor can match? That’s happening at an alarming rate, according to a new study from Northwestern Mutual.

This year’s recently released edition shows that Americans on average believe they will need $1.46 million to retire “comfortably.” This is an annual study, so we can identify trends in responses over the years. 

Retirement Magic Number: Rising Fast

For instance, the so-called “Magic Number” people say they need, on average, to tell the boss the “take this job and shove it” was up 15% from the 2023 study to this new 2024 edition. However, even the authors of the study used the phrase “whopping” to describe the 53% jump in the magic number since 2020.

That is just one part of the equation. Half of Baby Boomers and Gen X think they’re financially ready for retirement. This is disturbing because 11,000 Americans are turning 65 every day through 2027. 

A lot of people expect to be behind the curve as retirement approaches, with the average retirement savings level at a distressing $88,000. And this is on the heels of a historically strong period for the stock market.

Because unlike a magician, there’s not much up a lot of savers’ sleeves but worry about retiring as they wish. That calls for, among other things, a solid asset allocation strategy. 

Advisors have used that technique as their bread and butter for decades. However, stock and bond markets are at potentially vulnerable levels, with stocks at all-time highs and bond rates potentially moving higher with inflation.

Asset Allocation ETFs: No Magic Needed

What can ETFs do to help advisors to help their clients? Plenty! With more than 3,000 funds spanning a seemingly infinite number of investment niches, there’s something for any retirement situation. Among those are a wide range of Asset Allocation ETFs, including these: 

The $1.4 billion iShares Core Moderate Allocation ETF (AOM) is one of four in a series that range from Conservative to Aggressive. Each contains a mix of iShares ETFs, with AOM targeting a 40% stock and 60% bond allocation.

The $455 million Aptus Defined Risk ETF (DRSK) has a less traditional pie chart than most allocation funds. It accesses the fixed income market through a laddered corporate bond segment. Interestingly, this comprises 90-95% of the ETF’s assets. One might expect that to drown out all the upside that stocks can provide. But DRSK uses that remaining five to ten percent of assets to buy “at the money” call options on US stocks, which provides a leveraged effect without using leverage. It also put a floor on how much a rough stock market can do to this fund, as with call option purchases, the investor can only lose the amount they put up to buy those options. 

That magic number is climbing for the average U.S. investor. But this does not equate to needing magic to produce a retirement lifestyle rabbit in a hat. It simply takes proactive planning, including a focus on an asset mix and rotation approach that aims to slay the retirement dragon. Advisors are built for that responsibility and ETFs are able assistants.

Rob Isbitts was an investment advisor for 27 years before selling his practice to focus on ETF research and education. He is based in Weston, Florida. Contact him at  [email protected] and follow him on LinkedIn.