It’s 2024, and the world is changing fast – perhaps a bit too fast. Wouldn’t it be nice to finally get away from the hustle and bustle of running your firm or working your way up the career ladder and finally settling into that long-awaited – and well-deserved – rest? Unfortunately, even after years of saving and investing, our finances may still be behind our desires. Not because we’ve done the wrong thing. It’s just that retiring just isn’t as straightforward as it used to be.
Will Your Savings Last 30+ Years in Retirement?
Traditional retirement planning presupposes a 25-year retirement. To determine the savings you’ll need to maintain your lifestyle for those 25 years, you take the income you’d like each year and multiply that figure by 25, i.e., $70,000 x 25 years, equaling $1,750,000.
The issue is that a 25-year retirement is quite presumptuous. The current average retirement age is 61, (1) giving many Americans a full year before they can begin receiving Social Security benefits. You may be wondering – where’s the problem? The average life expectancy is about 76.4 years old – it actually went down because of COVID-19 and increases in early death rates unrelated to old age. A 25-year retirement from age 61 would put you at age 86, well beyond the average life expectancy, before extinguishing your retirement savings, and you’d still have Social Security to fall back on.
Do you plan on passing away at 76? We certainly hope not. In any case, the statistics are deceiving, as the chances of reaching age 90 are only increasing, and early deaths drag down average life expectancies. In 1980, only 2.8% of the population was over 90. In 2011, that number had nearly doubled; by 2050, it’s estimated that 10% of Americans will be over 90 years old. (3) If you’re 80 years old today, you have a 30% chance of reaching 90. In fact, according to Social Security Actuarial Tables, if you’re 76 today, you have a life expectancy of nearly ten more years, and if you’re 86, your life expectancy is 91!
Advancing Medical Technologies
Now, these are only today’s statistics. There’s excellent news on the horizon that could see significantly increased lifespans. Exciting new technologies that promise to slow the aging process are in the works; CRISPR technology has teamed up with artificial intelligence to enhance and quicken treatments of cancer and viral infections, and the first drug to fight Alzheimer’s became available this year. And these are just a few of the promising advancements that will help us live longer, happier lives.
The moral of the story is don’t count on passing away at the average life expectancy. The older you get, the greater your chances are of living longer due to conditional life expectancies, and advanced technology may see many of us living to 100 and beyond. That means you have to be prepared for a long and fruitful retirement!
The Social Security Issue
Have you reached or will you reach full retirement age in 2024? If not, and you decide to retire, your Social Security benefits will be reduced. If you turn 62 this year and claim Social Security, your benefit may be reduced by up to 30% – for life. Let’s return to the earlier point; if you retire early and have a much longer than expected retirement, you run the risk of running out of your savings and may be forced to rely on Social Security. Are you prepared to live off a drastically reduced Social Security benefit later in life?
That’s why looking into alternative financial products is essential to help secure your lifestyle if your savings fail to pull through until the end.
Are Your Savings Ready for Decades of Inflation?
Many of us felt the pinch of inflation when it reached forty-year highs in October 2022. However, runaway inflation is fortunately quite rare in the United States, which is why that stretch was particularly noteworthy. Regular inflation usually lurks in the background, and while you’re in the working stage of your life, it isn’t quite as noticeable as your pay raises may keep pace with inflation.
In retirement, an average 3% inflation rate may only become noticeable many years later. An early and longer retirement will drastically compound even a 3% inflation rate’s effects as the decades stack up. In only 25 years, everything will have doubled in price, and that $50,000 annual income will only be worth $25,000. What if you’re in retirement for forty years?
Sequence of Returns Risk
The stock market’s performance in the immediate years before and after retirement is vital for the long-term survival of your savings. Simultaneously withdrawing funds from your savings while they receive negative returns significantly reduces their ability to recover when the markets inevitably recover.
Of course, you could rebalance your portfolio to more stable bonds, but bond returns are historically significantly lower than stocks and may not provide the returns necessary to sustain a multidecade-long career, especially when factoring in inflation.
Unfortunately, it’s impossible to accurately predict a down year or series of negative market returns, so it’s critical to work with a financial advisor to create a plan of action in case you encounter a negative sequence of returns at the beginning of your retirement journey.
What are your expenses?
Have you accounted for every possible retirement expense?
The transition to retirement often involves many more expenses than anticipated, especially those further down the road. Be sure to carefully budget for all your planned leisure activities, housing, travel, insurance, healthcare, and daily living expenses, and ensure they align with your planned annual withdrawals from savings and other retirement income. Then, try to factor in any surprise expenses.
Unexpected costs, such as home maintenance, financial support for children, or healthcare expenses not covered by insurance, can strain both your finances and emotional well-being. A Society of Actuaries study from 2015 found that a third of retirees saw a 25% reduction in their savings due to major unplanned retirement expenses, with the number one expense being housing repairs; in second place were dental costs, often not covered by Medicare. While the study is dated, its findings are likely to remain relevant.
Then there are the long-term healthcare costs that 70% of older Americans are likely to incur and are just as likely to be unprepared for. A 2021 Federal Long-Term Care Insurance Program reveals that the average annual cost of a semi-private room in a nursing home was just over $100,000 a year, and prices are predicted to reach $159,372 in 20 years.
Maybe it’s too much to ask to plan for every possible expense in retirement. After all, we still want to maintain a lifestyle, have fun, rest, and make the most of our long-deserved retirements. However, there’s a difference between hoping for the best and sitting down with a financial advisor to create a long-term financial plan that helps you make calculated risks based on statistics, your financial realities, and your wishes.
In Conclusion
So, do you feel you’re ready to retire in 2024? Very likely! Has this article raised important questions you must ask yourself to determine your savings’ retirement readiness? We hope so! Not that we don’t want you to retire in 2024 – we just want you to be aware of all the risks and realities involved. Some are actually great news – such as potentially longer and healthier lifespans on the near horizon – but they throw unpredictable intricacies into retirement planning that are nearly impossible to figure out on your own.
Working with a financial professional can help you make the correct decisions regarding your ability to retire in 2024 – or any other year. A well-structured plan that factors in every possible retirement expense, risk, and goal can be the difference between a secure and fulfilling retirement versus one plagued by financial issues. If you’d like to sit down and discuss your retirement readiness with the team at CPA Retirement Solutions, we’d be happy to educate you on your options. Just click the button below!
