The Longevity Game: Saving and Spending into the Unknown
There's a point in the financial planning process where you have to make an uncomfortable assumption: How long are you going to live?
Putting an actual date on mortality carries a lot of weight, and not just because it's a topic no one likes to think about. This number has practical consequences in that it ultimately defines how much you should be saving before retirement and how you will need to manage your money in retirement to enjoy financial security through the end of life.
Pick a Number
Given the impossibility of knowing any individual's unique life expectancy, we have to rely on average life expectancy data when designing a financial plan—and round up to account for the fact that more than half of the population will be mathematically "above average."
We also factor in that, as you age, your life expectancy actually increases—because each year you live means you've already successfully avoided potential risks and causes of death. The average 65-year old today can expect to live another 19 years to age 84. If you've already reached age 75, the average expected lifespan stretches out to age 87. Statistically, men live one year less than the average and women live one year more.
You can check out the Social Security Administration's life expectancy calculator HERE. (NOTE: Calculations based on age and gender only.)
Pre-Retirement: How Much Should I Save?
The concept of longevity and saving for retirement is never so abstract as when you are 25 years old. Still in the first years of adulthood and independence, your career is in its earliest stage, and it's hard to imagine being 40 years old much less 65+.
At this point, trying to plan for retirement based on any particular life expectancy is far less important than simply starting to save for retirement. How much? A 2018 report by the Stanford Center on Longevity suggests it may be more than you think.
Highlighting two separate studies, the Stanford report indicates that individuals who start saving for retirement at age 25 will need to be consistently contributing somewhere between 10% and 17% of their income in order to have enough to retire at 65 and maintain the same standard of living in retirement. The percentage increases the later you start saving.
1. Munnell, A., Webb, A., and Hou, W. (2014). How Much Should People Save. Boston College Center for Retirement Research, July, Number 14-11.
2. Aon Hewitt. (2016). The Real Deal: 2015 Retirement Income Adequacy at Large Companies.
Of course, the conclusions from these studies are based on many generic assumptions, including, among them, life expectancy. However, even as estimates, these savings targets send a strong message—especially to younger workers who have time on their side—that saving for retirement must be a serious commitment sooner than later.
Once you get to within 10 to 15 years of retirement, a comprehensive financial plan can add definition to your retirement roadmap. This involves assigning an expected lifespan for you (and your partner) and modeling how your savings and assets match up to your anticipated income needs and goals. Ideally, we can identify any problematic cash flow gaps while you're still in your earning years and can take preemptive measures. This is also the time to review and consider your long-term care insurance options.
Post-Retirement: How Much Can I Spend?
Retirement is a game changer. No longer in the savings accumulation phase, you've now entered the strategic spend-down phase, which requires a different money management mindset. It's no longer a rarity for someone to live another 25 to 30 years in retirement, so how you spend your hard-earned savings is critical for ensuring your money can outlive you.
In retirement you will need to refine your financial plan to address these important questions and develop your retirement cash flow strategy:
What do your monthly living expenses realistically look like, factoring in "extras" like travel and other significant expenditures
When will you (and your partner, if applicable) begin taking social security? Are you receiving a pension or other reliable income stream?
What savings withdrawal strategy is most tax efficient, taking into consideration the types of accounts (pre-tax and after-tax) that comprise your portfolio and your tax bracket?
What asset allocation is most appropriate for each investment account given the time frame in which you will be drawing on the assets and your risk profile in retirement?
How will you fund the likely scenario of needing some form of long-term care in the future?
Is a goal to leave money for your heirs or charitable interests?
As your financial advisor, I cannot answer the question how long you will live. But I can use my expertise and experience to help you plan for your longevity potential so that you can achieve your retirement goals and enjoy your later years in stress-free financial comfort.
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