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MWA Retirement Insights

The Economics of Today's Retirement

The average age of most U.S. retirees today is 62 and the joint life expectancy of a non-smoking 62 year old couple is 92. Joint life expectancy means that one member of the couple will live to age 92 per actuarial tables! When I cover these facts about life expectancy in my Retirement Planning classes at the local library, people look at me in disbelief.  I really don’t understand why.  My parents and my mother in law are in their late 80’s and many of our retired clients say the same thing about their parents. If you look around at your family and friends, I think you’ll find that it’s not uncommon today for people to live into their 90’s.  So, if you retire around age 62 and live to age 92, you will be in retirement about 30 years. 

Let’s switch gears a minute and talk about retirement objectives. In other words, what are your primary retirement objectives or goals? Most people will say something like: “I’d really like to maintain my current lifestyle and not run out of money.”   Once you feel financially secure, your retirement objectives expand to other fun categories like travel, hobbies, visiting family, outdoor adventure activities, exercise, etc. Many people also gain pleasure and self-fulfillment through volunteer activities that allow them to give something back to their community.

OK, so we want to maintain our lifestyle and make our money last around 30 years. What is the biggest obstacle to making this happen? Of course, you already know it’s inflation - the silent enemy. The economic reality that happens right before our eyes that we really don’t see or realize until we look back over long periods of time, like 10, 15, 20 years. “Gee honey, we need a new roof (after 20 years) and its going to cost $9,000! The last time we replaced it, I think we paid around $5,000. Things are really getting expensive.” Historically, inflation has run around 3% per year. What does this mean to maintaining your lifestyle? Well, basically, it means that things you buy in year 1 of retirement will cost you about 2 ½ times more in year 30. So, if your annual living expenses are $60,000 in year 1, they will be $145,635 in year 30! If you don’t believe that you’ll live 30 years, the $60,000 becomes $108,367 after 20 years at 3%. That’s still a fairly big hurdle.

So, let’s review the economics of today’s retirement. We want to maintain our life style for 30 years without running out of money while our annual living expenses more than double. Oh and don’t forget, social security increases don’t keep up with inflation, our monthly pension (if we’re lucky enough to have one) never increases and we don’t want to take any risk with our retirement savings! As you know, low risk investments generally do not produce enough income to outpace inflation. The math simply doesn’t work and the money can’t last. Something has to be modified to improve our situation. That something is our attitude and knowledge about risk and investing and our willingness to invest in the stocks of good companies throughout retirement. We will discuss risk and investing for retirement in more detail in our next MWA Retirement Insights article.

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