Precision isn’t always possible when it comes to retirement planning. That doesn’t mean you have to wing it and hope your savings don’t expire before you do.
Looking at the income, living expenses and life spans of today’s retirees can help you make the right financial moves so your golden years aren’t tarnished by an unexpected shortfall.
WHAT’S AN “AVERAGE” RETIREMENT COST?
Government and Gallup data reveal a lot about what retirement is like for Americans today.
It starts at age 61, even though many tell Gallup they planned to work longer. And based on some morbid math — the average remaining life expectancy of someone who’s made it to their early 60s (23.3 years), according to the Centers for Disease Control and Prevention — you should plan to be retired for at least a few decades.
Your mileage may vary based on things such as your work (accountant versus rodeo clown, for example), diet, family health history and participation in extreme sports leagues.
The average budget for a retiree, according to Bureau of Labor Statistics data, provides even more color on what to expect when you’re expecting to retire. Older households, defined as ones headed by someone 65 or older, spend $46,000 annually, versus the $57,000 average spent by all U.S. households combined. The top three monthly expenses for those 65 or older are housing ($1,322), health care ($500) and food ($484).
On average, about half of a retired household’s income comes from Social Security as well as private and government pensions, according to the BLS, with personal savings and investment and rental income providing 6.9 percent.
FIND OUT HOW LONG YOUR MONEY WILL LAST
An online retirement calculator can project a more accurate picture of your retirement readiness. It will use your current saving, spending and investment profile, and some rules of thumb about historical investment returns, reasonable withdrawal rates and, yes, life expectancy. (Most calculators assume people will live into their 90s.)
What if the calculator shows that at the rate you’re going, you’ll outlive your retirement savings? If you’re not yet retired, one of the best moves is postponing your retirement party. This strategy is especially valuable for those in their peak earning years.
Besides reducing the number of years you’ll need to live off your savings, working longer allows more time for your investments to grow. Plus, the additional time contributing to Social Security could mean a bigger benefits paycheck down the road. Every year you postpone filing for Social Security after your full-benefit retirement age (66 or 67 for most people), your future monthly benefits check grows by as much as 8 percent per year until you turn 70.
HOW TO PAD YOUR PAYCHECK IN RETIREMENT
If you’re already retired and un-retiring or waiting to file for Social Security aren’t feasible, there are other ways to make up for the shortfall between retirement income and expenses.
• Leverage your home. If you have substantial equity in your home, a reverse mortgage can turn this asset into income.
• Shop for an immediate annuity.
• Withdraw less money during down years.
• Seek assistance. There are government, nonprofit and for-profit programs that provide benefits to struggling seniors. The National Council on Aging (NCOA.org) helps the 60-plus set navigate things such as Supplemental Security Income, Medicaid, debt management programs and subsidized housing.
The recent federal government shutdown showed how unprepared many Americans are to face a financial emergency. Financial security expert Pamela Yellen, a two-time New York Times best-selling author, provides a guide on building your emergency fund.
The longest U.S. government shutdown in history laid bare an uncomfortable truth: Americans aren’t saving enough and the majority of us have no emergency fund to protect us when a financial crunch strikes, Pamela says. More than 70 percent of all types of employees at all income levels live paycheck to paycheck and said they’d have difficulty meeting their financial obligations if their paycheck were delayed for just one week, a recent survey finds.
“This explains why, after missing just one or two paychecks, we heard so many heart-breaking stories from government workers who weren’t being paid or were furloughed,” Pamela says.
Emergencies don’t come with warnings. Sooner or later we all face the unexpected, whether it’s a job layoff or cutback or surprise expenses from a medical emergency, home repair, or tax bill. To prepare, Pamela recommends people build a safe and liquid rainy day fund equal to at least one year of household income, and shares a 4-step plan to do it:
Audit your credit card and checking account statements for the last three months to weed out charges for services you rarely use or don’t need.
Get clear on the difference between “wants” and “needs” – and put the brakes on impulse buying. One way to do this: wait at least 24 hours before buying anything that is not a necessity, and at least seven days before making any large purchase. Another is to try paying with cash for one month (studies show you’ll spend 20 percent less on average).
Take a hard look at your daily habits. Grabbing lunch at a fast food or other restaurant adds up. So does buying that $5 (plus tip) Starbucks coffee every day. Have trouble letting go of such expenses? Consider the reasons you need a healthy rainy day fund. “If you don’t have a sizeable emergency fund, you can’t afford it,” Pamela says.
Beware of “Parkinson’s Law,” which warns that “expenses rise to equal income,” to avoid spending all the money you’ll be saving.
The good news is you can build a safe and liquid rainy day fund that doubles as a retirement savings plan. To do this, Pamela advocates a strategy she calls “Bank On Yourself” as the safest way to build and protect wealth in any economy.
“The key is to get started building your emergency fund today – before you need it,” she says.
Rich retirees can’t switch off their savings mode.
Some problems are good to have.
That’s the situation for two readers who wanted advice on how to spend the money they’ve saved for retirement.
“My wife and I lived frugally for years, prioritizing our tithe and savings,” one reader wrote during my weekly online discussion. “We retired last year at 66 with over $2 million in investments and a mortgage-free home. Now that we have time, I would like to do a little traveling, nothing crazy, but maybe a cruise or safari once a year. But my wife can’t switch from saving to spending mode. We have money but don’t enjoy it. Do you have any suggestions on how I can help her understand that it’s okay to loosen up?”
Another wrote: “Any advice on helping someone who has been carefully saving become comfortable with spending in retirement? I’m not talking about getting wild and crazy. Just enjoying some of the fruits of a lifetime.”
This is not an unusual problem.
The Employee Benefit Research Institute (EBRI) released a research paper last year that found that retirees are slowly spending down their money.
Of course, it’s not without reason that many retirees are reluctant to dip into their investments. They’ve got a lot of guessing to do when it comes to making their money last.
“Retirees face several risks — uncertain life span, uncertain medical expenses, uncertain market returns — that might cause many to spend their retirement assets more slowly,” wrote Sudipto Banerjee, who authored the EBRI report. “In addition, throughout their working lives, many people develop a saving habit. Also, having guaranteed income for life, such as a pension, doesn’t make retirees more likely to spend down their assets either. To the contrary, of all the subgroups studied, pensioners have the lowest asset spend-down rates.”
Research shows that in the first two decades of retirement, the majority of retirees don’t spend down their assets, and “this behavior is not limited to those with lower levels [of] assets,” Banerjee wrote. “In fact, those with the highest level of assets show the lowest rates of spending down.”
Here’s the breakdown of EBRI’s findings:
— Within the first 18 years of retirement, individuals with less than $200,000 in non-housing assets immediately before retirement had spent down (at the median) about one-quarter of their assets.
— Retirees with incomes between $200,000 and $500,000 immediately before retirement had spent down 27.2 percent within the first 18 years.
— At the median, retirees with at least $500,000 had spent down only 11.8 percent within the first 20 years of retirement.
There’s no doubt I’ll probably be one of those slow spenders. I’m just wired to save, not splurge. But I’m trying to break the habit. I don’t want to die having not enjoyed my money.
Here are some tips to help you or your spouse let go of some of your retirement funds:
— Figure out a baseline of your necessary spending. Review your retirement budget. If you know you have enough to cover your needs, you can free yourself from that fear and have some fun. Remember, your budget shows you what you cannot afford — but it also shows you what you can afford. So, just like you used to budget to replace a car, put in a line item for that cruise or safari.
— Review your net-worth statement. This is how my husband gets me to loosen my grip on our savings. The net-worth statement has all the numbers in one place. It offers a big-picture look at what you have. And if you have a lot, you can afford to treat yourself.
— Consider your beneficiaries. Sure, you may want to leave them some money. But ask yourself: Do you want them to enjoy your money more than you?
Are you reluctant to spend your retirement funds not because you’re anxious about running out of money but because it’s hard to make the switch from saving to spending? Send your comments to firstname.lastname@example.org. Please include your name, city and state. In the subject line, put “Retirement Spending.”
And send me your tips on how you overcame being stuck in savings mode.
How to live it up without going broke before you die
The top regrets of retirees
Retirement regrets: What retirees would say to their younger selves.
Retirement Rants and Raves
I’m interested in your experiences or concerns about retirement or aging. What do you like about retirement? What came as a surprise?
If you haven’t retired yet, what concerns you financially?
You can rant or rave. This space is yours. It’s a chance for you to express what’s on your mind. Send your comments to email@example.com. Please include your name, city and state. In the subject line put “Retirement Rants and Raves.”
Lots of readers wanted to discuss the fact that President Trump never once mentioned fixing Social Security during his State of the Union address earlier this month.
By 2034, lacking any fix, the reserves for the Old-Age and Survivors Insurance Trust Fund, which pays retirement and survivor benefits, will be unable to pay full benefits. And the Disability Insurance Trust Fund, which pays disability benefits, will no longer be able to pay full benefits by 2032.
Without a solution, Social Security will only have enough continuing tax income to pay out 77 percent of what is scheduled. Less severe but still falling short, the Disability Trust Fund will only have enough money coming in to cover 96 percent of benefits when its reserves are depleted.
I asked folks to weigh in about the security of Social Security.
“Why would anyone be surprised Trump did not mention Social Security?” wrote Edward Gaulrapp of Haymarket, Va. “He doesn’t need it or care about it.
Laurel Wentz of New York City wrote: “I think it’s terrifying that fixing Social Security isn’t on Trump’s wall-obsessed radar. I guess ‘Fix our retirement’ isn’t as catchy a chant at rallies as ‘Build that wall.’ And to those who aren’t too concerned because they think Social Security is an easy fix, that’s only if the government acts now to raise or remove the cap on earnings.”
Jerry Warshaw of South Orange, N.J. wrote: “The reason Trump doesn’t care about Social Security funding is because it is part of the ‘Socialistic Society’ of America that he would like to eliminate. Because his daddy took care of him, he has no appreciation of how ‘other people’ live, support themselves or have retirement funds. This egomaniac is in a position way above his abilities and we are all going to suffer even more when our deficits come home to roost. PREPARE for the next depression!”
“It is sad that the social security crisis has been so well known, and it seems like fixing it has not been a priority of any party,” wrote Anthony from Florida. “Either party could have set in motion proactive corrective action years ago. Right now, there is a lot of noise in the system and far too much posturing opposed to meaningful action. To me, the fix is simple, that is structuring a year-over-year step function raising of the cap starting immediately to meet the funding requirements. Unfortunately, no party seems to have the courage to do the right thing for the nation if it means losing votes and power. So much for serving the needs of the country.”
“We workers pay Social Security taxes for decades in order to receive a modest check during retirement,” wrote Michael Drake of Gainesville, Ga. “This is not a giveaway! Which is more important? Sending astronauts to Mars or ensuring the widowed old lady with heart failure receives her Social Security check?”
Jim Donnellan of Falmouth, Mass., wrote: “As a 50-something, I would have no issue with raising the age for eligibility for Social Security benefits. Of course, that would need to be phased in so as not to break faith with those closing in on their retirement years.”