Just over one month ago, the Retirement Ahead blog addressed retirement as the most expensive purchase of a lifetime. Merrill Lynch has documented that retirement will require 9 times the cost of a four year college education and nearly 3 times more than the value of the average home.1 This funding gap is not new, and it has widened over many years. However a new, more extreme chorus has arisen, “Retirement is more expensive than ever.”2 What circumstances have unified these various voices or warning?
Our hand is not four aces…the opponent may have them.
Longevity is the most important factor determining (or undermining) the success of a retirement plan. If a plan’s participant population exceeds the accepted mortality tables upon which it is structured, there will possibly be insufficient funds to support the promised benefits. According to the Society of Actuaries, longevity for both men and women at age 65 has jumped more than 10 percent since 2000!3 A study authored by David Blanchett, Michael Finke, and Wade Pfau estimates that the price of providing $1 in retirement income has increased 50 percent in that same time frame.4
Compounding the problem of increased longevity is expected lower returns for financial assets over the coming years. Blanchett included in the report, “If the long-term averages hold, we can’t expect returns to stay as high as they’ve been.”5 The Wealthfront Blog has stated, that models project future equity returns likely below those of the past century.6 While this conclusion is not unanimous among analysts, (the Wealthfront Blog notes all forecasting models lack precision) it is concerning.
The third of the four “aces” in the hand of retirement’s opponent is underestimated financial risks. Christopher Scalese reminds us that it is often better to overestimate health care costs post-retirement. It is also wise to project sudden financial impacts such as the loss of a spouse or unexpected financial needs by a child or grandchild.7 Any, or all, of these can create a significant drain on retirement assets.
Finally, the potential decrease in Social Security benefits must be considered. The Retirement Ahead blog has consistently reported the political pressure to maintain Social Security Retirement benefits at some level, but there are many predictions of future reductions. The Congressional Budget Office is “Expecting that Social Security benefits will need to be cut by 31% beginning in 2031 if no changes are made to the program.”8 History has proven the spotty track record of CBO financial projections, but the Social Security Trust Fund itself has projected a 21% reduction beginning in 2034.9 A solid retirement plan must prepare for this “ace.”
“We can’t all, and some of us don’t. That’s all there is to it.”
Yes, this famous quote from Eeyore points to the differences in human nature. It is true that all humans cannot dance well and some do not. However, when it comes to financial planning, we all can at some level. Some may use larger numbers due to salaries and family wealth, but we all can plan for the future. Let’s make sure Eeyore is WRONG…none of us don’t!
Give first! Practice the virtue of generosity. This blog is not advocating a tithe, because we do not believe in a 10% goal. We need to live generously. Just as our lives hinge upon God, all our assets belong to God. A generous life sees not only the need to give to the church, but the plight of others as well, and shares with them to meet their needs.
Save more! Make saving for the future the second rung on the income ladder rather than the accumulation of posssessions. If returns are lower in the future than a decade plus ago, saving more will provide the income needed in retirement. Saving more also allows us to meet urgent needs without resorting to borrowed funds.
Spend less and eliminate debt. A frugal lifestyle empowers the virtuous life of generosity. When needs arise, the frugal spender has funds available. The frugal spender minimizes and eliminates the use of debt. The frugal lifestyle is a life of freedom since the debtor is the slave of the lender.10
Pray, plan, pray, and plan more. Seek the wisdom of God. Seek advice from trusted financial advisors. Begin working at it while you have the advantage of youth. Discuss the issues of spending, generosity, and saving with your spouse. Model these commitments to your children, but discuss them as well. Do not imagine that children will automatically see what their parents are doing, understand the motives, and replicate them in their lives. Examine your progress against your plan regularly. Make wise adjustments when necessary.
Retirement is expensive, and becoming moreso. It is NOT unreachable!
1 Finances in Retirement: New Challenges, New Solutions. Merrill Lynch in partnership with Age Wave. 2017.
2 The Rising Cost of $1 in Retirement Income. Miller, Mark. wealthmanagement.com. March 24, 2017.
3 Miller, ibid.
4 Miller, ibid.
5 Miller, ibid.
6 What long-term returns should I expect from US stocks? Malkiel, Burton G. blog.wealthfront.com. March 16, 2016
7 3 Financial Risks That Retirees Underestimate. Scalese, Christopher. kiplinger.com. January 2017
8 31% Cut in Social Security Benefits Needed by 2031: CBO. Napach, Bernice. Think Advisor. December 27, 2016
9 Napach, ibid.
10 Proverbs 22:7