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Retirement Funding

How much money do I need to save before I retire?  

It’s one of the most common questions we hear and one of the most difficult to answer.   To give an accurate response, we would need a few other questions answered first.  These include:  What are your expenses?  How are your savings invested?  What’s the market going to do?  How much will you spend on health care and/or long-term care in retirement?  More importantly, how long are you going to live?

According to the Social Security Administration, a man retiring at age 62 can expect to live another twenty years on average.  For a woman, this number increases to 23 years.  For this reason, many individuals and advisors use 85 as the default life expectancy when planning for future needs.  

Planning for an average life expectancy is akin to walking across a lake that is, on average, four feet deep.  

Nearly a quarter of men and over a third of women in this group will live to be at least 90.  A recent study done in the UK by the Department for Work and Pensions projects that for those born in 1957 (age 62 now) 10 percent of men and 15 percent of women can expect to have a 100th birthday.  

Clients often chuckle when we project their retirement to age 100, as this is our default planning horizon.  While they make comments like, “I’ll be lucky to see 70,” I often wonder if 100 is enough.   I attended the funeral for a 102 year old friend of the family a few weeks ago.  The last couple of years of her life were some of the most expensive, due to an extended care need.  

Another response I regularly receive from clients is, “I don’t want to live to be 100.”  My default response to this is, “no one wants to live to be 100 until they’re 99…”  There is no question that as a country we are spending an unsustainable amount of money on end of life medical care.  With an aging population, we will likely have to address this issue at some point.  A few states have legalized assisted suicide, but so far, the uptake rate has been very low.   

Oregon was the first state to legalize Physician Assisted Suicide in 1998.  After 20 years, fewer than 2,000 individuals have decided to take their own life with the help of a doctor.  While an increase in social acceptance and awareness may increase these numbers, it appears that even when facing pain, suffering and a hopeless diagnosis, most people will choose life over death.  

Knowing that there is at least the potential to live a long life, we believe almost everyone should plan for 100 and beyond.  The simple fact that living to 100 would mean a 30 or 40 year retirement for most people creates the need for careful and deliberate allocation and consumption of financial resources.  Additionally, because of the long time horizon this creates for a prospective retiree, the uncertainty of other factors becomes more pronounced.   

No one can predict how the stock market will perform tomorrow, the rest of the year or for the remainder of the decade.  Where is the S&P 500 going to be in the year 2055?  Similarly, while many have accepted low inflation as the new normal, we don’t know what the rate of inflation will be for the next five years, not to mention the next 35.  

Given the level of uncertainty we face as we look to the future, it is our job as planners to prepare for any combination of good and bad outcomes.  We know that everyone doesn’t live to 85 years of age, your investment portfolio won’t return 5% each year and inflation won’t always be a steady 3%.   Many of the retirement “plans” people bring into my office from their current advisors model these exact market conditions and often have little tolerance for variance in any of these key factors.  While I rarely see plans that meet my criteria for Pessimistic Planning, some are actually worse than described here.  I’ve seen plans that assume no inflation or increase income by a token .5% or 1% each year to account for inflation.   While these numbers may prove to be accurate, there is a strong likelihood that they won’t  I would hate to see what it would look like if we took one of those plans and changed the assumption to extend the client’s life expectancy to 100, increased average inflation by a few percentage points, modeled dynamic rather than constant market returns and threw in a long-term care event.  My guess is the numbers wouldn’t work too well.

We will continue to explore these and other challenges in future posts.  While there are countless ways to derail a retirement, most we have at least some control over.  There are five key uncontrollable  factors that will influence if not determine how well you fare in retirement.  They are:

Longevity – as discussed here

Incapacitation – Medicare will cover many of your medical expenses but none of your extended care needs.   For the 50% of the population that will need one or more years of care, this may be the biggest individual expense in retirement.

Market Risk – Most people look to stocks, bonds and other financial assets for long-term growth, but there can be short (or not so short) term losses.

Inflation – How much will your money be worth when you spend it?

Taxes – It doesn’t matter how much money you earn or how much income you generate, but how much you get to keep.