Some financial advisers say your nest egg should be large enough to last until you’re 100, but is that realistic?
You know that Americans are living longer. In fact, they expect to live longer than their parents by a 4-to-1 ratio, according to a report by the Longevity Project, formed by the Stanford Center on Longevity. The group interviewed 2,200 adults in preparation for its new report, “Planning for the 30+ Year Retirement.” One finding is that the move from defined-benefit (pension) plans to defined-contribution (401(k)) plans has left older adults wondering how much they need to save before they can retire. Adding years to their lifespan only increases their worry, especially when financial planners are often plugging in 95, and even 100, as common default end-of-life ages.
That’s not going to be the reality for most people. The typical man in the U.S. who is 65 can expect to live 18 more years. The typical woman, about 20. But many financial planners feel they need to cover their bases by making every client save as though we’ll all wind up centenarians.
Professionals React
When adviser Carolyn McClanahan heard the 100-years-old number mentioned at a financial planning conference, she reacted with disbelief. “Even when you have a 350-pound guy
who smokes?” she asked the speaker. McClanahan has cred: she is a medical doctor as well as a certified financial planner, and she contends that medical advances “aren’t happening that fast.”
“You come into the emergency room and you die, or I’m telling you that you have cancer,” says McClanahan, who has worked both in emergency rooms and pathology labs. “That makes it really hard for me to tell people to save, save, save.”
Of course, brokerages want as much of our money as they can get, so they are complicit in the idea that we should aim high and save the maximum possible. And financial advisers have a real fear of getting sued by older clients or their children when the retirement money river has run dry.
"I definitely have concerns that many advisers are being way too conservative," says Michael Kitces, a certified financial planner and well respected blogger. “Most of our improvements in life expectancy are coming from the decline in child mortality. The actual survival rate of people in their 80s and 90s is not increasing very fast.” He points out that actuarial tables reveal there is a 70% chance of one or both members of a married couple making it to 85, but the odds are only 20% either of them will see 95, and less that they may live to 100.
The 4% Rule
Another factor is the safe withdrawal rate that is often used to forecast how long a nest egg will last. Research shows that the 4% rule works well over past markets, but some advisers warn that economic growth is slowing and we should only count on 3.5%, or perhaps even 3%. But financial planning industry consultant Bob Veres says that even the 4% number may be too conservative in most market situations. And most of us will spend less as we age, so we might want to take out a bit more in early retirement, when we can still travel, indulge hobbies and otherwise kick up our heels.
“I think only the client knows whether the inconvenience of spending less in retirement is more or less painful than the risk of cutting back drastically later in retirement if the markets don’t cooperate,” Veres says.
Will You Have Enough?
But if you are one of the few who outlive your fellow men (or women), how much do you need to retire? With all of this uncertainty, it can help to run the numbers. A retirement calculator can help you estimate what amount you’re comfortable with. Try the retirement calculator at NewRetirement or use the FIRECalc retirement calculator to see how your money would have fared historically.
If you are beginning to wonder whether you’ll ever be able to retire, check out these strategies:
- Wait to claim Social Security until you reach 70. Sure, you can claim as early as age 62, but if you wait until your full retirement age (depending on when you were born) your check will grow by 30%. Put off claiming until the top age of 70, and your benefits will be 75% more.
- Continue to work. You can either push back your retirement date, or quit the job you’re doing now and get a retirement job so you can delay using as much of your retirement savings.
- Consider an annuity. Carefully evaluate this option, which will give you lifetime income (like a pension) for a lump sum.
- Consider a reverse mortgage. If you own a home, it may be able to fund a portion of your retirement. A reverse mortgage pays you while reducing your equity.
- Decrease expenses. You may be able to downsize or move to a state with lower taxes and/or home prices.
Most Americans are not saving enough for retirement, according to many studies. While that is certainly true in many cases, you need to examine your situation closely to see if you may be sacrificing unnecessarily. We all want a comfortable retirement, but there is a balance in enjoying our early retirement years and sacrificing for the future.
