Retirement is an important financial milestone for many people. But there’s a serious blind spot that many people have when it comes to planning for retirement.
In the past, we have seen people retire at 65 and live another 10 to 15 years. However, with advances in longevity science, people are living longer, and the idea of living beyond 15 years is underrated in my opinion.
According to a 2019 study by the Centers for Disease Control (opens in new tab), a 65-year-old man today can expect to live, on average, to 76, while a 65-year-old woman can expect to live to 81. 90’s and beyond. In fact, according to his PEW Research survey in 2016, (opens in new tab)The number of people living to 100 years old is increasing rapidly.
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What should people do to plan for longevity?
This increase in life expectancy means that people need to save more money for old age, and they need to save what money they have to avoid running out of money.
Now that the population is aging, I think there is a good chance that people will retire as many years as they worked. Consider this: You start working at 20, work for 40 years until you’re 60, and when you retire he will live to be 100. So for 80 years, your need for income increases, you quit early to retire and start relying on your own assets to sustain yourself. .
There are many variables in creating an income stream in retirement while protecting that income stream. That can be difficult, especially given the unpredictable and volatile nature of the stock market.
From the 2019 Retirement Attitude Survey (opens in new tab) According to a study conducted by the Employee Benefit Research Institute (EBRI), more than half of American households are at risk of running out of retirement benefits due to lack of savings and stock market unpredictability. Therefore, it is important for retirees to plan and invest carefully to ensure a reliable source of income in retirement.
Think about when you first started your career and how much money you were making. Then fast forward to today and compare the differences. Hopefully that number has increased, but in retrospect we can see that these increases were not necessarily lifestyle improvements, but inflation adjustments.
To illustrate this point, 2% inflation may seem like a small number, but multiplying it by 10 years translates to 20% or 20 cents on the dollar. So if today’s salary is $50,000, in 10 years he should earn $60,000.
If you make $50,000 today, you’ll need $72,000 in income 20 years from now to live the same lifestyle.40 years from now, you’ll need $72,000 to live the same lifestyle that $50,000 today offers. $108,000 is required.
Lack of forward-thinking people
According to an EBRI survey, only 42% of Americans have attempted to calculate how much money they will need in retirement. This is shocking, given the dangers it poses.
It turns out that most people have arbitrary numbers about how much they want to save for retirement, but what really drives the decision to retire is often social security eligibility. is.
My concern with this is that a lot of the people I talk to are making decisions based on the current situation, relying too much on things they have no control over.
Given that much of what affects your money is out of your control, it has a lot to take on. The big three are inflation, markets and taxes.
To offset inflation, you need to make more money than inflation reduces your purchasing power.
To protect yourself from market losses, you should either not participate in the market at all or ideally isolate your portfolio using a broad diversification strategy that is perfectly uncorrelated with the stock market.
To protect against taxes, you need to focus on building tax-exempt assets and stop the tendency to defer taxes for later.
Now, these may seem like common sense moves, but in my experience, so many people do the opposite of these things.
I see people funding 401(k) accounts, which goes against what I outline about taxes.
I see people putting money in their bank accounts without knowing what to do with it, which goes against trying to keep up with inflation.
We see people pouring money into the stock market, chasing returns and maintaining tight asset allocations.
More Americans Need Strategic Planning
I believe we need to address these areas and develop a strategic plan that tries to move things under the control of retirees rather than just crossing the numbers and hoping that everything will be fine. increase.
Of course, I don’t have a crystal ball, but I have to realize that if the market is going down, this could be seen as an opportunity to invest money in the market, but I’m retiring and investing If you draw income from to cover your living expenses, this is a problem.
My approach to this problem is simple. Avoid using the stock market as a means of earning income. Because you have no control over the outcome. It’s a gamble, basically trusting the government and Wall Street to do the best for your portfolio.
Ironic? Yes, but every day I see headlines that make me scratch my head and wonder how this circus will end.
You may want to quit what you are doing
There is now a time and place to invest in the public markets with a long-term view, but the whole meaning behind “long-term” is that you don’t need the money until a later date.
I don’t know if you remember the 90’s non-profit ad by book author Susan Powter, Stop the madness! (opens in new tab) That catchphrase that was often played on TV still remains in my head.
According to a 2018 article by Mental Floss (opens in new tab)Powter made $50 million in 1993, telling people what they already knew: If you’re not healthy, you can’t keep doing what you’re doing.
I think the same can be said about retirement planning, so I bring this up. If you’re retiring, need income from your assets, and are unsure of what the market has been doing over the last 20 years, it might be time to stop doing what you’re doing.
Now all my wealth management friends reading this say the market is going to do well you just need to give it time and I’m not necessarily against it. But my question is how much can the people who earn it live on?
Yes, the market cycles up and down, so there’s no reason to believe this time will be different, but a recent study using ChatGPT shows: (opens in new tab), retired on January 1, 2000, and began withdrawing $50,000 from a $1 million portfolio invested to match the S&P 500, you would have been short of cash in 2008. increase. The market as a whole is not the same as someone retiring and earning income from their investments.
The thing to understand is that money accumulation is done one way and income withdrawal is done another way. they are not the same thing. Otherwise, there is no need to distinguish between the two.
The conclusion for me is: Planning for retirement is not something to take lightly. Underestimating how much you’ll need to maintain a comfortable lifestyle in retirement or over-relying on things you can’t control can be a significant financial risk.
We recommend working with a financial advisor who specializes in distribution to find the best strategy for your chances of living longer than expected in retirement. Careful planning allows retirees to focus on enjoying their golden years rather than dealing with income shortfalls later.
To learn more about retirement strategies and how they impact your retirement, visit YourGapReport.com. (opens in new tab).
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