Many of us will continue to work well into our 70’s and that’s not such a bad thing. After all, it’s a blessing to still be alive, healthy and useful. Over the past half-century, medical technology breakthroughs and healthier lifestyles have led to increased life spans for Americans. Actuarially, retirees at age 65 can expect to live about 20 more years and for a married couple with both spouses in their mid-60s, there is a high probability one spouse will live past age 90*.
Longevity puts pressure on our savings as we grapple with the risk of outliving retirement money. It used to be more common to retire and live comfortably for a few years primarily on pensions and Social Security, but fewer and fewer companies are now providing defined benefit plans. Instead, most of us will leave the workforce with our accumulated savings in employer-sponsored retirement accounts such as 401(k)s and 403(b)s which will likely need to be rolled over into individual retirement accounts (IRAs) and monitored ourselves for potentially 30 years or more.
Fortunately, there is Social Security.
Often underappreciated, it is especially valuable if one can wait until age 70 to start collecting the higher benefits. Social Security provides steady payments for as long as you live, like a pension, but these payments are adjusted annually for cost of living increases. With yields on safe fixed income investments currently hovering around 1.0%, Social Security has become all the more worthwhile. It would take two million dollars of 5-Year Treasuries to generate the same $20,000 of annual income that many retirees receive from Social Security. Or similarly, a fixed annuity costing about $300,000 would need to be purchased.
Inheritances can also help if managed prudently.
A balance of money at retirement will safely last many decades if a low-cost diversified investment portfolio is consistently maintained and initial annual withdrawals limited to 4.0%. In cold hard numbers, if you need an extra $50,000 a year to live on (increased annually for inflation) it would necessitate a starting amount of over a million dollars to support expected long-term withdrawals adjusted for rising costs.
Inflation is brutal on savings.
Inflation has averaged approximately 3% a year over the last century. At that rate in 25 years, when many of us really do want to stop working, today’s prices will have doubled. Stated differently, your current income will purchase half as much as it does today.
Thus the need to invest intelligently:
- Buying and holding a diversified equity portfolio is the most reliable strategy for ensuring the value of your retirement balance outpaces inflation and withdrawals. Stocks are assets that appreciate as overall prices increase. Returns can be volatile and uncertain in the short run (typically negative a third of the time) but the long-term reward has historically been well worth the risk.
- Bonds, on the other hand, are obligations to pay in dollars and those dollars are locked in unless you hold Treasury inflation-protected securities (TIPS) that adjust payments with increases in the level of prices. A significant benefit of holding a broadly diversified bond portfolio is the stabilizing contribution it makes to overall returns during periods of stock market declines.
- A meaningful allocation to international securities is important in this regard, too, because if inflation picks up domestically, the value of the dollar will likely fall and foreign stocks can serve as a hedge. Money invested in foreign currencies would then be worth relatively more compared to the U.S. dollar.
Proper planning can help.
There are many good reasons to continue working after an initial career ends. It is worth planning ahead so that continuing to do so is an agreeable choice rather than a necessity. But either way, one is fortunate to have the opportunity.
*Source: National Center for Health Statistics
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