Note: This story is sponsored by The Alliance for Lifetime Income.
Last week — amid frightening health reports emanating from the rapid spreading of the coronavirus — there was a piece of positive health-related news as well. For the first time in four years, according to a report from the Centers For Disease Control and Prevention, life expectancy in the United States is on the rise.
For the total U.S. population, life expectancy now stands at an average 78.7 years. For men, the average is now 76.2 years. We women get almost another half decade. Our life expectancy now averages 81.2 years.
Time to throw a party? That likely depends on two things — first, how well you understand the concept of life expectancy, and second, how well-situated for retirement you’re feeling yourself. Let’s take them one by one.
What is “Average Life Expectancy”?
The CDC defines life expectancy as “the expected average number of years of life remaining at a given age.” The first thing that surprises people about how this works is that when we say that the average life expectancy for women is now 81.2 years, that means half of women hit that number and just keep on going.
The other often misunderstood phenomenon is that the longer you live, the longer you’re going to live. That’s why, for people who live until age 65, the average life expectancy is 19.5 years, which takes them to age 84.5, on average. Here again, women who make it to 65 live longer than men who live to celebrate their 65th birthdays, living an average of 20.7 additional years (to age 85.7) versus the 18.1 average additional years men get (taking them to 83.1).
Your life expectancy depends on how you live your life (if you smoke, if you always wear seatbelts, etc.) as well as genetics. But suffice it to say, unless you have a very good reason to believe you won’t, planning to live until age 95 or 100 — and saving and investing with an eye toward making your money last that long — is a very good idea.
A New Tool To Help With Planning
The recent signing of the SECURE (Setting Every Community Up for Retirement Enhancement) Act into law brings a number of changes to the retirement landscape. Among the most important is a once-a-year-estimate of what the balance in your retirement savings account would provide if you converted it, using an annuity, into a retirement paycheck.
To be clear, there are different strategies you can use to withdraw money from your retirement account in order to make it last:
- You can adhere to the 4% rule, which basically holds that as long as you withdraw no more than 4% of your balance each year, your money should last for 30 years. (Some retirement experts advocate taking a little less.)
- You can also convert some of your nest egg into an annuity, to provide an income stream, that when added to Social Security and any pension income (if you have it), will provide enough to cover your fixed expenses. You can then invest the remainder to provide the sort of growth necessary to keep up with inflation. (For more see Annuities Decoded: 5 Myths You Need Dispelled as You Plan for Retirement.)
Either way, unless you’ve run the numbers on what your portfolio is likely to produce as income, you may have no idea whether what you’re saving is enough to fund the sort of lifestyle you’re envisioning in retirement. And many people are not running those numbers, according to a February 2020 survey from Charles Schwab.
Tackle Uncertainty with a Plan
Schwab found that nearly six out of ten pre-retirees (people age 55-plus) are overwhelmed about determining how much they can spend in retirement. And that wasn’t the only frightening finding. Some 72% of people are worried they’ll outlive their savings in retirement, 64% are overwhelmed by the thought that they might not be able to maintain their current lifestyle, and 60% are worried about the thought of not getting a paycheck.
So, what can you do? Three things.
1. Figure out what life in retirement is likely to cost you.
Try to ballpark it against the life you’re living now. Will your mortgage be paid off? Are you planning to stay in your own community or move somewhere less expensive? What expenses currently paid for by your employer (healthcare, for instance) will end up on your plate? If that’s too difficult a calculation, assume that you’ll spend about 85% of what you’re spending now.
2. Figure out what money you’re likely to have coming in each month.
Go to socialsecurity.gov to get an estimate of your likely benefits. Until your retirement paycheck numbers start to show up on your account statement, use a retirement calculator to determine what continuing to save at your current rate will likely produce for you by retirement. You can also use this calculator from the Alliance for Lifetime Income to see if your retirement income is likely to be enough to cover your living expenses.
3. If it’s not enough, adjust.
This usually means increasing your savings rate until you’re putting away a good 15% of your income annually (including employer matching dollars.) However, if you’re getting a late start or have gotten off to a slow start in terms of the amount you’re saving, you might want to aim for more. The retirement saving benchmarks set forth by Fidelity can help you identify your target. They say you should aim to have saved 1x your income by the time you’re 30, 3x by 40, 6x by 50, 8x by 60 and 10x by the time you retire. Formulaically, if you accomplish this, you’ll have enough to replace 85% of your pre-retirement income for the following 30 years.
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