In today’s episode of StreetSmarts, we’re going to tackle the question of When can I retire? This is an intensely personal question. Every person’s retirement outlook is different! The bottom line is that you’ll be able to retire when the income streams you create — Social Security, your savings, investments and any other sources you might have — are enough to support your desired standard of living after you leave your job. Most financial planning doctrine says that this usually equates to about 80% of your working lifestyle annual expenses. Of course, there’s no one-size-fits-all answer here. Many retirees plan to travel the world after they retire, while others are perfectly content with living a simple (read: inexpensive) life.
What we do know is that we should expect to live a long time! In 1930, five years before Social Security legislation was passed, the average life expectancy of U.S. citizens was 59.7 years. Thus, the math worked out somewhat favorably for a program designed to pay workers a continuing income after retirement at age 65. The number of people who could statistically expect to live long enough to collect was relatively limited, and the percentage of people older than 65 was less than 6%. Today the average life expectancy in the U.S. has gone up to almost 80 years. In fact, digging into the numbers, if an American female lives to age 65, she has a 75% chance of living to age 78, a 50% chance of living to 85 and a 25% chance of living to 91. These numbers increase when we look at the odds of at least one spouse in a married relationship.
So, is it a million dollars or two million dollars that’s needed in retirement? Well, let’s do some time-value of money math to illustrate two different individuals, age 65 ready to retire. Individual A has a more expensive lifestyle. He envisions spending about $7,000 a month above and beyond what he is receiving in social security. This equates to about $84,000 a year beyond social security. If we assume an annual rate of return of 5% and a lifespan of 30 years to age 95, that individual theoretically needs a portfolio of $1.3 million to stretch over those 30 years of distributions. That portfolio would need to be even larger if we assumed that individual wanted to leave a financial legacy to beneficiaries.
Conversely, Individual B only plans on spending about $2,000 per month beyond social security or $24,000 annually. Again, assuming a 30 year lifespan and an annual rate of return of 5%, the starting value of that portfolio on the eve of retirement would need to be only be about $373,000. While these are merely examples, they aim to illustrate that small changes to inputs, can drastically affect what is theoretically needed in retirement.
Perhaps a more appropriate initial question is how do I envision my life in retirement? While the usual narrative tends to be golf, grandchildren, and travel, we all know that life in retirement is more complicated than that. As we all live longer lives, there’s an awful lot to consider about your retirement years – from choosing the right Medicare plan to the possibility of downsizing or moving. It means having a plan to generate income in your portfolio while also understanding your sustainable draw-down rate.
Retirees want to be able to live their desired lifestyle when they are no longer actively employed. They want to solve the problems that come with longevity, and those problems, more and more, go beyond simply funding their retirement accounts with stocks and bonds. Control what you can control, and make the most of those things that you can control. But lean on your TEAM to evaluate the factors that are somewhat or completely out of your control within your comprehensive retirement plan.
If you aren’t sure if you’re on track for the retirement you want, it’s a smart idea to consult Howe & Rusling financial planners who can assess where you stand and suggest a savings and investment plan to get you where you want to be. Remember, a team of competent individuals is a force multiplier.