Planning for a 30-Year Retirement

There are many challenges facing boomer retirees, including longevity, inflation and market risk, taxes and unforeseen expenses, just to name a few. Everyone is susceptible to these risks, but there are ways to avoid some or all of these risks that may arise in retirement. As retirees are living longer, retirement planning is becoming somewhat daunting to think about. Funding what is now a 30-year retirement for many seems like a long shot, especially those that do not have adequate plans in place. While planning your retirement, there are many things to consider.

How much should I be saving? And how long will I need my retirement income?

Although the rule of thumb is to replace 70% of your pre-retirement income in retirement, that may be unrealistic. The replacement ratio may actually be more in the neighborhood of 80% for those with very high incomes. Although Social Security will provide the majority of retirement income for low- earners, high-earners will have to rely more heavily on savings.  We also have to look at longevity, and how much longer we are living than in the past.

To put this in perspective, in prior generations, these risks were less of a worry, since retirees were expected to live to about 70-75 years old. When the retirement age of 65 was enacted back in 1935, the average mortality age for a man was 64, compared to 84 years old in 2018. That is an extra 20 years of income that is needed to sustain yourself and dependents in retirement. Given this, longevity is one of the greatest challenges for retirement planning, due to the unpredictability and underestimation of life expectancy.

Unavoidable Systematic Risks

Systematic risks affect everyone in the overall market. These are unavoidable, and you must plan to hedge against these risks. The risk of inflation goes hand in hand with longevity. As we know, the longer one lives, the more purchasing power they (potentially) lose as inflation increases. Not only does this mean that the cost of goods in the future increase, but it also means that the value of their savings will deteriorate if their investments do not perform, or if they are in low return investments.  Of course, market risk is a risk that anyone would take as an investor in the market, however having a plan in place would alleviate this risk substantially if anything were to occur.

Have a Plan!

It is important to have a solidified plan prior to entering retirement. Income from Social Security, pensions, and other sources are vital in order to have an overall idea of your income that will be spread out across your retirement. Investing in annuities is a common way to hedge against longevity. Originally, annuities were designed to protect against outliving your savings, but they provide so much more, as they are exempt from probate and creditors, and provide guaranteed retirement income that will last as long as you will. On a different note, allocating funds into the stock market, diversifying your portfolio (domestically and internationally) are possible solutions to hedge against inflation. With accurate goals and planning, retirement planning can and should be seamless.

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