Retirement Readiness in 2024
Do you have enough saved?
One traditional method to determine your necessary savings is multiplying your desired retirement annual income by 25. So, if you’d like an income of $80,000, you’d ideally have at least $2,000,000 in retirement savings. However, Americans are experiencing longer and longer retirements, and savings for 25 years may not be enough. According to a Gallup poll, the average retirement age in America in 2022 was 61, ¹ nearly aligning with the earliest you can claim Social Security benefits. The problems here are twofold. If you retire at 61 with savings for 25 years, you may run out of your savings by age 86. This is beyond the average life expectancy – for now.
With the advent of artificial intelligence and an explosion of scientific advancement, life expectancies may significantly rise in the coming decades. In the past year, both Harvard Medical School ² and the University of Edinburgh³ have revealed new drugs and therapies that can drastically slow the aging process. While these therapies still have a long journey before hitting the shelves and treating people (if ever), it goes to show that anti-aging treatments are on the horizon. The prospect of a much lengthier lifespan introduces a problematic variable to account for in your financial plan, albeit a welcome one.
Another issue is that by claiming Social Security benefits early, you are reducing your monthly benefit for life (unless you later on claim your spouse’s higher earnings history as your own, in which case you would receive 50% of their benefit). If your savings ever deplete, you’ll be dependent on Social Security, and choosing to claim early may drastically reduce your end-of-age lifestyle.
If you’re contemplating retirement in 2024 and haven’t reached full retirement age, be prepared for a reduced monthly Social Security benefit and potentially (hopefully!) a longer life expectancy. Be sure to have a flexible withdrawal strategy and a backup plan in case those savings run out.
What are your expenses?
Retirement may cost a lot more than you think, so before making the transition, it’s vital to calculate every possible expense, both immediate and down the road. How much do you plan on spending on entertainment, housing, travel, insurance, health care, and food? Do those numbers align with your annual withdrawals from your savings and other retirement income sources?
Shifting away from an earning status to solely a spending status can be difficult emotionally, and each significant and unexpected expense you face will not only put pressure on your finances but your mental health as well. Housing maintenance, helping your kids financially, and uncovered health costs can arise as unexpected financial shocks.
These are not minor shocks, mind you. A 2015 study conducted by the Society of Actuaries showed that one out of three surveyed had their assets reduced by 25% by one of the primary retirement shocks, with housing repairs leading the way. ⁴ Remember, as you age, so does your home. Replacing your roof isn’t cheap, so be sure to set aside a percentage or two of your retirement income for housing repairs. The runner-up in retirement shocks was dental costs, a prominent healthcare cost that Medicare doesn’t typically cover.
While this may be an older study, I don’t see any reason as to why today’s situation would be any different.
Another significant expense is healthcare costs. While Medicare may cover the costliest expenses, it may not cover subscription costs and auxiliary medical services, such as routine checkups, hearing aid devices, eye exams, and the big one – long-term care. And chances are that you’ll need it. According to LongTermCare.gov, there is a 70% chance that Americans 65 and older will require some form of long-term care in their lifetimes, ⁵ and most are unprepared for it. ⁶ A 2021 Federal Long Term Care Insurance Program shows that the average cost of a semi-private room in a nursing home was $100,740 a year, with projected costs expected to reach $159,372 in 20 years. ⁷ Such a blow could extinguish whatever savings you have left.
Also, be aware that if you do retire before Medicare activates, you’ll have to figure out a way to cover any insurance gaps, as your work insurance may discontinue once you leave work. As we all know, insurance isn’t cheap, plus it doesn’t cover everything.
After factoring in these expenses, you may find that your current savings may not be able to handle any unexpected significant costs, especially later in life. It’s essential that you head into retirement with as little debt as possible, ideally without any, so that you can make the best use of your retirement dollars.
Inflation reached a forty-year peak in October of 2022, reaching 7.7% higher than the previous October of 2021. ⁸ The stretch of high inflation in 2022 drastically increased the cost of living, and while your portfolio doesn’t indicate the purchasing power of your savings, they are directly affected. Also, this surely wasn’t the final bout of high inflation, and as you go through retirement, you may begin to feel the pinch as you are able to buy less and less year after year.
The effects of inflation are greatly compounded by both an early retirement and a longer retirement. Assuming a 3% inflation rate, you’d need to double your monthly income to maintain your lifestyle in 25 years.⁹ What if your retirement spans much longer? How will periods of high inflation further affect your purchasing power? A million dollars now would equal $3,262,037.79 after forty years, assuming you live to the ripe old age of 101 and retire at age 61 – a very likely scenario given technological advancements.
Sequence of Returns Risk
Positive market returns in the years running up to and the first years of your retirement are crucial for the long-term prospects of your savings. The issue is that you are withdrawing from your savings each year, reducing its ability to maintain the momentum necessary to overcome negative years.
Let’s look at an example.
Michael has $1,000,000 invested in the stock market on the eve of retirement. Going into retirement, he adheres to a 5% withdrawal rate, removing $50,000 from his savings at the beginning of each year, with the remainder being subjected to the whims of the market. In his first year, his portfolio experiences a 10.14% loss. The following years’ returns are as follows: -13.04%, -23.37%, 26.38%, 8.99%, 3.00%, 13.62%, 3.53%, -38.49%, 23.45%, 12.78%, 0.00%, 13.41%, 29.60%, 11.39%, -0.73%, 9.54%, at which point he runs out of savings in year 18.
However, had those negative returns occurred after that year of a zero percent return, he would have $479,562 in his account at the end of year 17. The years you experience inevitable negative returns are highly influential, as we can see.
In case you were wondering, I didn’t pull these figures from thin air. These are the historic S&P 500 returns between 2000 and 2016, as per Macrotrends.net. ¹⁰ You may recognize the astonishing plunge in 2008 when the S&P dropped 38.49 percent. Had Michael retired just a few years later, his situation would have been drastically different.
Of course, this is a simplified scenario that doesn’t factor in a host of other issues that would improve or worsen Michael’s retirement readiness – Social Security, taxes, other sources of income such as rent from real estate investments, pensions, or investments. Your financial scenario is likely to be much more complex than Michael’s.
What Are the Solutions?
There isn’t any one-size-fits-all solution when it comes to your retirement. Each individual and family has a different financial situation, needs, goals, health situations, and visions of retirement. However, some fundamental considerations could be the following:
Work longer: Naturally, many of us want to retire as soon as possible. But for every additional year you work, you reduce the long-term effects of inflation. Each earning year is another sizeable contribution to your investments, and another year you don’t withdraw from your savings. Plus, as we live longer, healthier lives, we may not actually be sacrificing a year or two out of our retirement by working longer.
Move to a Cheaper Region: Many Americans head to greener pastures once they retire, but unfortunately, they move to an area even more expensive than the one they left behind. Moving to a more affordable part of the country will reduce the pressure on your savings, giving you more money to spend as you please. Plus, your savings may last longer as well.
Downsize: The kids have long since moved out, and the price of your house has likely soared in value over the years. Do you really need all of those extra rooms and living space anymore? This also ties into moving to a cheaper region. By selling your existing home for a sizeable profit and purchasing a cheaper home in a more affordable area, you’ll end up with a windfall on your hands – a windfall that can potentially give you many extra years of savings.
Have a Financial Plan: Many Americans head into retirement without a solid plan and end up lost in the maze of taxes, Social Security benefits, and withdrawal strategies. With the correct plan, you won’t have to worry about whether or not you’re withdrawing too much from savings, if you’re over- or underinsured, or if you’ve chosen the correct Social Security claiming strategy, all while factoring in your tax burden properly.
This article wasn’t written to scare you out of choosing to retire in 2024. It’s written with a deep concern that individuals or couples may retire without accounting for every possible factor, unprepared for the major retirement risks and concerns. Unfortunately, it’s impossible to account for every detail – retirement is inherently risky. But it’s also absolutely vital to prepare as well as you can. The proper retirement plan could be the difference between running out of money or living the retirement of your dreams and leaving behind a significant legacy for your loved ones.
Sitting down with a fiduciary financial advisor whose only objective is to look after your best interests can help alleviate the worries and risks associated with retirement. If you’d like WealthGen Advisors to craft a retirement plan or review your existing one, we’re here to help. You can schedule a consultation by clicking the button below.