Your retirement income not only needs to be adequate, but it needs to last for as long as you live. Whether it does will depend on how well you plan ahead for the variable circumstance that you will encounter. Key ones that everyone must plan for are:
Longevity: Since no one knows for sure how long they will live, it is important to know the amount of savings needed to support your needs for a longer period of time than just one's "average-life-expectancy". The latest statistics show that 50% of men who retire at @ 65 will live past @ 85, and 25% will live past @ 92. But, when you consider the odds of survival of the last living individual from a couple (such as husband and wife) at @ 65 the survival ages increase dramatically. Mortality statistics show that there is a 50% chance that last survivor of the couple will live past @ 92 and 25% past @ 97.
Health Care Expenses: Fidelity Benefits Consulting estimates that a 65-year-old couple retiring in 2013 will need approximately $220,000 to cover medical costs in retirement. These costs will include out-of-pocket prescription drug costs, Medicare Part B and D premiums, co-payments, coinsurance, deductibles, and excluded benefits. Increasing life spans, rising medical costs, declining employer-sponsored medical coverage, and possible shortfalls ahead for Medicare all add up to make health care expenses a critical challenge for retirees to plan for and cover.
Inflation: Over the long-term, inflation has averaged just above 3% annually. It is important to include an assumed rate of inflation when planning for your savings needs. Even low rates of inflation can significantly reduce retirees' spending ability. With just 2% inflation, after 25 years, $100,000 would then have a purchasing power of just $60,954. At 3%, purchasing power would be reduced to $47760, and at 4% to just $37,512.
Investment Allocation: Fearing losses, some saving for retirement (as well as some retirees) want to avoid stock investment altogether, preferring to invest solely in fixed income and cash equivalent investments. But, by doing this, they also give up long-term growth and increase the risk that they will outlive their money.
To improve the rate of investment returns over time it is necessary to add stock ownership one's investment savings. Historical records for different allocations through good and bad market times have produced the following results:
Conservative Stock Allocation: 20% stocks/40% bonds/30% cash equivalents has produced a 6% annual return.
Balanced Stock Allocation: 50% stocks/40% Bond/10% cash equivalents has produced a 7.9% annual return.
Growth Allocation: 70% stocks/25% bonds/5% cash equivalents has produced an8.9% annual return.
Aggressive Stock Allocation: 85% stocks/15% Bond/0% cash equivalents has produced a 9.5% annual return.
Withdrawal Rate: It is important to have an average annual withdrawal rate from one's savings that will be sustainable. If the percentage of savings withdrawn each year is to high, it can significantly affect how long your savings will last. A conservative withdrawal rate is generally considered to be in the range of 4% to 5%. The rate that you can afford to withdraw will, of course, depend on your overall financial circumstances, but it is important to monitor the level of remaining savings over time and to adjust your withdrawal rate if necessary.
Greg Tinaglia
(last updated 06.28.2015)