One of the top issues discussed on our radio show and in person with our retiring clients is: “Will I have enough money to last for the rest of my life?” While the fear of running out of money before you run out of time is a serious matter, proper planning early in your retirement preparations can improve your chances against the risks to your retirement income.
While most people look forward to living a long life, they also want to make sure their longevity is supported by a comfortable financial cushion. As the average life span has steadily lengthened due to advances in medicine and sanitation, the chance of prematurely depleting one’s retirement assets has become a matter of great concern.
Consider a few numbers: According to the latest government data, average life expectancy in the United States climbed to 77.9 years for a child born in 2007, compared to 47.3 years in 1900. But most people don’t live an average number of years. In reality, there’s a 50% chance that at least one spouse of a healthy couple aged 65 will reach age 89.1
Inflation, or the tendency of prices to increase, varies over time as well as from region to region and according to personal lifestyle. Through many ups and downs, U.S. consumer inflation averaged about 4% over the 50 years ended December 31, 2012. If inflation were to continue increasing at a 4% annual rate, a dollar would be worth 46 cents in just 20 years. Conversely, the price of an automobile that costs $23,000 today would rise to more than $50,000 within two decades.
For retirees who no longer fund their living expenses out of wages, inflation affects retirement planning in two ways: It increases the future cost of goods and services, and it potentially erodes the value of assets set aside to meet those costs – if those assets earn less than the rate of inflation.
The cost of medical care has emerged as a more important element of retirement planning in recent years. That’s primarily due to three reasons: health care expenses have increased at a faster pace than the overall inflation rate; many employers have reduced or eliminated medical coverage for retired employees; and life expectancy has lengthened. In addition, the nation’s aging population has placed a heavier burden on Medicare – the federal medical insurance program for those aged 65 and older – in turn forcing Medicare recipients to contribute more toward their benefits and to purchase supplemental insurance policies.
The demographic forces that have led to an increasingly older population are expected to continue, putting more pressure on the financial resources of the Social Security system – the government safety net that currently provides more than half of the income for six out of 10 Americans aged 65 or older. It is estimated by the Social Security Administration that benefits would have to be reduced by 25% in 2033 if no adjustments are made to the system.2
The decision about how much money may be safely withdrawn each year from a retirement nest egg needs to take into consideration all the risks mentioned above. But retirees also must consider the fluctuating returns that their personal savings and investments are likely to produce over time, as well as the overall health of the financial markets and the economy during their withdrawal period.
While the risks discussed above are common to most people, their impact on retirement income varies from person to person. Before you can develop a realistic plan aimed at providing a sustainable stream of income for your retirement,
you will have to relate each risk to your situation.
For example, if you are in good health and intend to retire in your mid-60s, you may want to plan for a retirement lasting 30 years or longer. And when you estimate the effects of inflation, you may decide that after you retire you should continue to invest a portion of your assets in investments with the potential to outpace inflation.
Developing a realistic plan to address the financial risks you face in retirement may seem beyond you. But you don’t have to go it alone. An experienced financial professional can provide useful information, as well as valuable perspective on the options for successfully managing what may stand in the way of your long-term financial security.
1Source: Social Security Administration, Period Life Table, 2007 (latest available).
2Source: Social Security Administration, 2012 Annual Report, April 2012.