Rising prices, longer lives, volatile markets, and higher taxes are conspiring to rob millions of people of a comfortable and rewarding retirement. Will you be one of them? Are you using old-school planning strategies? Here’s why they don’t work today:
1. You’re going to live a very long time. In 1970, the average age of retirement in the US was 65 and average life expectancy was 73. So on average, the retiree needed to plan for eight to ten years of retirement. Today, many people are retiring at 60 or younger and will live well into their 90s – a 30+ year retirement. That’s three times as long.
2. Inflation could eat you alive. If retirement was going to last 10 years, we’d tell you not to be terribly concerned about inflation. But in a 30+ year retirement, a three to four percent annual inflation rate can devastate your retirement savings. In fact, a 3.5 percent inflation rate will cut the buying power of a dollar in half in just twenty years. This is the single largest risk to a successful retirement and most folks don’t even see it coming.
3. Your taxes may, in fact, be higher in retirement – not lower. Conventional wisdom suggests that your tax bill will drop once you retire. We would suggest that it’s a different world today. With Social Security and Medicare consuming more resources each year, Congress can only raise revenue by raising taxes. So while your income may drop in retirement, your tax rate may actually increase, resulting in less take home retirement income.
4. Safety is not safe. Protecting your principal through the use of CDs, Money Markets, and bank savings accounts only makes sense when the price of goods is falling. Falling prices make a dollar today worth more if you keep it until tomorrow. But unless you were born before 1932, the price of goods and services has been rising your entire life.That means a dollar today is worth less than a dollar tomorrow. Protecting your principal was a fine strategy for your grandmother during the Great Depression, but it will simply not work for today’s retiree. Retirees will find they have to withdraw more each year to combat inflation and they will simply run out of money before they run out of life.
5. Healthcare expenses will continue to rise. It’s estimated that a couple aged 65 today covered by Medicare will need $220,000 to cover out-of-pocket healthcare expenses in retirement.* Why so much? Better healthcare, technology, and health science breakthroughs have cured many of the things that used to kill us, but they haven’t yet cured the things that make us sick. Having a sound and comprehensive plan not only for general healthcare, but for the potential of a long term chronic illness, is a critical priority to avoid compromising your retirement assets.
If your retirement plan is based on old-school strategies, perhaps it’s time for an update. Give us a call – we’d be happy to help.
*Fidelity Benefits Survey, 2014