How long do you think you’ll live? We share the most common answer from our clients below.
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Today, we discuss three retirement planning dynamics, including life expectancy, Social Security timing and spending changes during retirement. All three play a critical role in your retirement’s financial stability.
Also, let’s acknowledge that some retirement planning decisions are not easy to make. Therefore, please contact us anytime. It’s why we’re here, to help you maximize your retirement savings and make well-informed financial decisions.
Background Resource
There’s an annual report financial advisors often reference called Guide to Retirement by J.P. Morgan Asset Management. It’s a comprehensive collection of retirement planning trends and includes several interesting charts.
For our discussion, we highlight three charts, since the subjects have an outsized impact on your retirement’s financial stability.
Life Expectancy Probabilities (Chart 4)
Whatever you think your life expectancy will be—assume it’s longer for financial planning purposes!
In the last hundred years, life expectancy has doubled primarily due to advances in health care, economic development and lifestyle changes. In fact, individuals from younger generations like Gen Zers (born between the mid 1990s and early 2010s), will routinely live to age 100 or older.
For individuals and families with investable assets ranging from 1 to 3 million, you have roughly a 20% chance of living to age 92. For married couples, there’s a 50% chance one of you will live to 92.
In our planning meetings, it’s common for clients to estimate their life expectancy. The most popular guess is age 82. However, it’s important to acknowledge that these estimates are exactly that—estimates.
Life expectancy is a key factor in retirement planning, i.e., it drives savings withdrawal rates. Also, since no one knows their expiration date, it’s important to not underestimate.
Related: The Living to 100 Life Expectancy Calculator uses current medical and researched scientific data to estimate your life expectancy. Give it a try.
Social Security Timing Trade-Offs (Chart 12)
If you’re thinking of retiring before full retirement age, avoid taking Social Security early if possible.
Why? Because, for every year you wait to take Social Security after age 62, you earn a guaranteed 8% more in Social Security income each year. Instead, it’s typically better to draw down your investment portfolio than to lose the guaranteed 8% each year, since there’s no market-return guarantees.
Remember, claiming early is a permanent reduction in your monthly benefit amount compared to waiting until full retirement age or even delaying benefits beyond that age.
There are many reasons to take Social Security early, including poor health, caring for a family member and others. Every situation is unique, however, it’s important to consider multiple Social Security claiming scenarios before making a final decision.
For Example:
Let’s say you’re married and your household needs additional income entering retirement.
For long-term retirement income optimization, one scenario is for the lower earner to claim Social Security at full retirement age. For this example, we’re using age 67 at $2200 per month. However, the higher earner postpones claiming beyond full retirement (age 67 at $3000 per month), waiting roughly four years to claim at an 8% annual increase, resulting in almost $4000 per month.
Keep this in mind, if you claim Social Security at age 62 and live into your 80s, you’ll miss out on hundreds of thousands of dollars.
Before claiming Social Security, call us so we can help you understand the full impact on your portfolio.
Resource: Social Security Full Retirement Age Calculator
Changes in Spending (Chart 30)
There’s a term used to explain retirement spending phases called the Retirement Spending Smile.
In general, retirement spending typically takes the shape of a smile. Specifically, spending is higher in the initial years, dips during the middle years and then increases again in the later years.
Simple Example:
Referencing the chart below, spending extra on travel early in retirement is common. But, as you age it drops off, while health care spending grows.
Understand Your Retirement Spending Limits
One of our jobs is to tell you what you can afford to spend during retirement.
If you want a closer look at how your estimated budget impacts your portfolio, let us know. We’re happy to model different budget scenarios and their impact on your retirement income withdrawal rate.
Rule-of-thumb: It’s likely you can spend more during your initial retirement years, as long as you’re budgeting to spend less during your mid-retirement years.
Costly Spending Trend
In general, one costly financial event during retirement doesn’t usually hurt you, e.g., a new car. Instead, it’s the constant overspending year after year that jeopardizes your portfolio.
Managing Portfolios vs. Uncertainty
Clients often ask, “How do you design my portfolio to account for all the uncertainty, e.g., market volatility, so it has the highest probability of success when I need to start withdrawing money for retirement?”
There are multiple steps to managing your portfolio for success, however, one key approach is setting aside enough liquid assets, so you don’t have to sell when the market is down. This set-aside gives you a margin of safety. For example, if you need to draw $100,000 a year from your portfolio, we set aside roughly $200,000 in cash-equivalent assets. The set-aside is still earning interest, but also highly liquid.
In Closing
Life expectancy, Social Security timing and retirement spending all culminate to strengthen or diminish your retirement income plan, and just one short-term change in your strategy can easily enhance your financial stability.
Comments or Questions
Your comments and questions are always encouraged. Please reach out anytime.
–David Bunker, Financial Advisor & Fiduciary
Before You Go
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Also, receive help retiring to the life you want, schedule a complimentary financial planning consultation.