The latest news on retirement preparedness is not encouraging. According to a Wall Street Journal analysis, an estimated 40% of households headed by people aged 55 through 70 are unlikely to have sufficient resources to maintain their standard of living. This group’s median 401(k) account balance is just $135,000, which might be enough for a $600 per month joint life annuity for a couple aged 65 and 62.
More troubling, the debt for this cohort is on the rise. New York Federal Reserve data indicate that those aged 60 through 69 had about $2 trillion in total debt, an 11% increase since 2004. Car loan debt was up 25%, and student loan debt increased by a factor of 6!
More and more people will have to work longer to achieve the level of financial independence necessary for retirement security.
How long should you plan for?
At the same time, life expectancies are improving, raising the financial stakes further. According to the Social Security Administration, men turning 65 this year will, on average, live to age 84.3, and women to age 86.7. Many retirements will last for 25 or 30 years. About one in four of those now 65 will live to age 90, and one in ten to age 95. You may calculate your own life expectancy with the calculator found at https://www.ssa.gov/planners/lifeexpectancy.html.
How much will you need?
Developing a realistic retirement budget is an important exercise that requires examining values as much as resources. Some people enjoy living rather modestly during retirement. But one retiree we know says, “Life is too short to drink cheap wine.” The retirement budget needs to be understood from three perspectives.
Essential versus discretionary spending. Which expenditures could be curtailed, even eliminated, in the event of financial reversals? Food is essential; restaurant dining is not. Is there room in the budget for savings?
Structural versus peripheral expenses. Some costs are binding, not subject to modification, and failure to meet them means a structural change in retirement. If you own real property, you must pay the taxes. If you have a mortgage, you must make the payments. If you own a car, you have to pay for routine maintenance. Trips, vacations, and gifts, in contrast, are peripheral expenses.
Fixed versus inflation-prone costs. Inflation has been very mild in recent years, but this may not be a permanent condition. Most retirement expenses are vulnerable to inflation, while retirement income generally is fixed. The response to inflation may include cutting back on optional purchases or substituting less expensive items for those that become unaffordable.
Understand also that long, modern retirements typically include three phases:
- active retirement, filled with travel and pursuit of deferred dreams;
- passive retirement, typically beginning in the mid-70s, when activities are gradually reduced; and
- final retirement, a period often marked by failing health and a need for long-term care.
A different retirement budget applies to each of these three periods. For more information on how Legacy can assist you with the decision to retire, visit our Retirement Planning page at https://www.lptrust.com/our-services/retirement-planning/.
We Can Help Build Your Legacy
We specialize in two areas of personal financial management:
• Helping clients to achieve financial independence, using tax-sensitive techniques as appropriate.
• Helping clients to maintain financial independence by providing unbiased investment advice and trusteeship.
If you are a Legacy client and have questions, please do not hesitate to contact your Legacy advisor. If you are not a Legacy client and are interested in learning more about our approach to personalized wealth management, please contact us at 920.967.5020 or firstname.lastname@example.org.
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Any developments occurring after July 1, 2022, are not reflected in this article.
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It is not intended as legal, accounting, or financial planning advice.