It's the proverbial good news, bad news story: Americans are living longer. The good news is not only that we're living longer but that we're staying healthier longer, too, so we're able to enjoy those longer years. But the bad news is that unless we've planned well enough to avoid running out of money, we might have trouble financing those extra years.
First, here are the facts. According to the latest federal statistics, average longevity for U.S. men and women is at an all-time high: 75.3 years for men and 80.4 years for women. But, if you make it to age 55, you can expect to live until you're 79 if you're a man and 83 if you're a woman; and if you're 65, you can count on making it to 82 (male) or 84 (female). Odds are that this trend is going to increase. Some life scientists are forecasting that within another two generations, life expectancies in the industrialized nations of the world could reach 100.
Think of what this means. If you retire at age 55, you could already spend almost the same number of years in retirement as you did earning a living.
Meanwhile, there's pressure on the retirement-income end of the equation. Stock market values have declined in the past few years, interest rates are near historical lows putting the squeeze on fixed incomes, fewer and fewer employers offer pension plans, and demographics are working against the health of the Social Security system.
In 1950, when Social Security had been around for less than 20 years, there were 16 people working for every retiree (Source: Social Security Administration, 2010). Today, that number has dropped to 3.3 workers per retiree, and by 2025, it will reach - and remain at - about two workers per retiree. That means there's a chance that benefits will have to be reduced, unless taxes increase.
The bottom line is that whether you are still working or already retired, you need more than ever to have a sound financial plan to cover your retirement income needs. Here are the considerations:
If you haven't yet retired--
- Can you retire as young as you previously planned or hoped, or should you postpone it by working full-time? And should you consider easing into full retirement by several more years earning income part-time?
- How many years do you need to plan for? A conservative plan would cover you at least until you reach the age of 85.
- Are you saving enough every year? Remember that once you're older than 50, the federal government increases the limits on how much you can contribute to tax-deferred retirement plans.
- Which is better for you: a traditional tax-deferred retirement plan that requires you to pay taxes on your withdrawals, or a Roth IRA/401(k) that you fund with after-tax income but pay no taxes at all when you make withdrawals?
- What asset allocation strategy will achieve the growth rate you will need to reach your nest-egg goal?
- What provisions should you make for long-term health care?
If you're already retired--
- If you're able, should you find a source of part-time income?
- Do you need to pursue higher interest rates on your bond portfolio? If so, how much risk should you take to get them?
- Should you increase your portfolio exposure to stocks to potentially raise your long-term growth rate?
- Should you consider making adjustments to your lifestyle, particularly for discretionary spending on such items as vacations, club memberships, dining out, and entertainment?
We may or may not have passed the bottom of the current economic and stock market cycle, in which case market and fixed-income returns will or won't go up from here. Whatever the case, our increasing longevity means you need to change your assumptions about how big your nest egg has to be and how you manage it to meet your long-term goals.
Please call if you'd like help with this analysis.