With life expectancy rates continuing to climb, today’s workers are likely to spend more time living in retirement than any generation that has come before them. Even the concept of “old age” is being redefined. The number of centenarians in the U.S. is projected to grow from about 72,000 in 2015 to more than 600,000 by 2060 according to the U.S. Census Bureau.1
Coupled with other changes—most notably questions about the future structure of Social Security and the ongoing shift from defined benefit to defined contribution among employers’ retirement plans—increased life expectancy has important repercussions on the way current workers need to approach retirement planning. Clearly, not everyone will live to be 100, but statistically speaking, the odds of living considerably longer than one’s parents and grandparents are high.
Managing risk in retirement
Developing a realistic plan for retirement requires consideration of multiple issues, often present in terms of risk factors. Among some key factors that should be considered are life expectancy, asset accumulation, withdrawal rates in retirement, future healthcare costs and lifestyle expectations. While it is difficult, if not impossible, to predict what some of those factors will be in the future, it is important to formulate best estimates wherever possible.
A number of life expectancy calculators can help you estimate future longevity and are available online. Depending on the calculator, they may take into account family history, health, lifestyle, diet, exercise and even driving habits.
Plan for longevity when calculating income and expenses
The bottom line is that people working today should expect to live a long time in retirement and base their planning on that assumption. The rest of the process involves figuring out how much money you will need in retirement to support the lifestyle you plan to pursue, what sources of predictable income you will have and how you will cover the difference between your income and your needs—in other words, how big a retirement nest egg you need to amass.
Predictable income sources include Social Security (you can get an estimate of your future benefits at different retirement ages at www.ssa.gov), defined benefit retirement plans and existing annuities. Those who are still working may be able to participate in an employer-sponsored retirement plan. To calculate how much you’ll need for retirement, subtract your monthly predictable income (e.g., Social Security, annuities, other distributions) from your expected monthly expenses. That figure is the additional amount you will need to be able to withdraw from your retirement savings on a monthly basis to maintain your retirement lifestyle.
Calculating how large a nest egg you will need and how much you must save each month to achieve it involves many variables. Besides longevity, you must factor in the effect of inflation on your savings and anticipated rates of return on your principal. With more people living longer, starting to plan now is more important than ever to maintain your lifestyle in your retirement years.