The vast majority of pre-retirement Americans have not taken the time to really conceptualize their impending retirement. For starters, one can Google a variety of surveys that discuss the various levels of fiscal confidence heading into retirement. Depending upon the survey, most pre-retirees are not entering or preparing for retirement with the needed degree of financial certainty. Many appear to be simply tepidly hoping that they will make it. Further compounding the problem are the quantitative assumptions on which people are factoring their decisions. Let’s delve into these quantitative assumptions, as poor assumptions will lead to a catastrophic outcome in retirement.
Life Expectancy: Take a married couple aged 62, non-smokers, the mean age of the second death is forecasted to be 92. Most people do not consider how long they will likely live. Understand we are looking at the “average”. Most of the readers of this publication are not average. You more than likely have taken care of yourselves and continue to make the choices which tend to prolong your life expectancy. You eat correctly, exercise and regularly visit your doctor. If you are a child of a member of the baby boomer generation, you should plan to live to 100 or more and if you are a grandchild of a “boomer” you should plan to live well beyond age 100. I strongly believe that this is not only possible, but probable. I absolutely believe people are underestimating their life expectancy.
Inflation: In forecasting for retirement, many people select what is commonly known as the Consumer Price Index or the CPI for their inflation rate. The assumption of CPI for retirees is, in my opinion, impractical. With all due respect, older people do not experience CPI inflation but an inflation rate which is actually higher. This is because a greater than average amount of their spending goes towards healthcare and discretionary spending. Healthcare inflation is more than twice normal inflation and consider the effects of inflation associated with discretionary spending (movie tickets, airline tickets, food, cruises, etc.). We utilize a 4% inflation rate. Inflation will silently and slowly attack your standard of living in your later years.
Investment Returns: As one approaches retirement, the general theory is to become more conservative with investments. Buying bonds, CD’s and any other “fixed income” investment as you enter a rising income environment is fiscal suicide. Your cost of living will be rising as your income may not. Any income you will be receiving, i.e. pensions, social security, will most likely not keep up with your personal rate of inflation. You need to make a retirement investment plan that fits your risk tolerance while also understanding the length of your retirement and the effects of inflation.
Preparing for retirement can be a sobering exercise. Please thoroughly and thoughtfully examine your assumptions as you determine how much income you will need at retirement and how much money you will need to save to attain a dignified, comfortable retirement.
By Chris Conner, CFP®
Advisory Services offered through J.W Cole Advisors. Securities offered through J.W. Cole Financial, Inc. Member FINRA/SIPC. J.W. Cole (JWC) and J.W. Cole Advisors (JWCA) and North Florida Wealth Advisors are unaffiliated independent entities.