Live Long and Prosper

Published On: June 22, 2018

Written by: Ben Atwater and Matt Malick

Along with the good news that people live much longer lives today comes the challenge of preparing for an extended retirement.

A man reaching age 65 today can expect to live, on average, until age 84.3, while a woman turning age 65 today can expect to live, on average, until age 86.6.

One in twenty women who are currently 40 will live to see their 100th birthday and the same is true for one in forty men.  The average American woman who reached age 65 in 2015 had a better than one-in-three chance of seeing her 90^th birthday, up from a one-in-four chance 50 years ago.

Not only are lifetimes longer, but people’s financial positions have changed dramatically over the decades.  In 1970 about 25% of adults age 65 and older lived below the “poverty line.”  Today, Americans age 65 and older have a median annual income of $25,757, well above the present American “poverty line” of $12,060 in annual income.  Less than 10% of seniors now fall below this line, thanks to Social Security.

As Social Security and Medicare have been lifesavers for seniors, the growth of these programs has coincided with a changing landscape for retirement savings.  Traditional pensions accounted for 67% of tax-deferred savings in 1978.  By the end of 2014 this share had fallen to 34%.  Today, instead of defined benefit plans (traditional pensions), workers are responsible for their own retirement savings through defined contribution plans (401(k)s, IRAs, etc.).  The share of Americans’ savings held in defined contribution plans is now 50%, up from 20% in 1978.

Additionally, Social Security, the cornerstone of American retirement, faces significant challenges over the intermediate term.  2018 is the first year since 1982 where the government will pay out more in Social Security benefits than it collects.  In response to the 1982 shortfall, the National Commission on Social Security Reform issued findings that called for higher taxes and delayed retirement ages, which Congress and the President acted on, effectively saving Social Security for a generation.  Today, the media and politicians have decided to completely ignore what was deemed a crisis in 1982.

Similar to 1982, the problem today stems from demographics, which are considerably worse.  In 1960 there were about nine workers paying into the system for every individual receiving Social Security benefits.  Today there are only 4.3 workers for every Social Security beneficiary.

By 2050, one-fifth of the total U.S. population will be 65 or older, up from 12% in 2000 and 8% in 1950.  The number of people age 85 or older will grow the fastest over the next few decades, constituting 4% of the population by 2050, or 10 times its share in 1950.

Over the next 30 years, the Congressional Budget Office projects that Social Security outlays will increase by almost 30% from 4.9% of GDP in 2017 to 6.3% in 2047.

The moral of the story is the trend of the past 30 years of individuals being more responsible for their retirement will only continue to increase.

But, the urgency that should exist, seems to be lacking.  According to Fidelity Investments the average 401(k) balance for those aged 60 to 69 is $167,700.  If a 65-year-old male living in Pennsylvania purchased an immediate annuity with $167,700, his lifetime annuity benefit would be about $924 per month.  That won’t get one very far to begin with . . . but, think about twenty years down the line, when $924 will only have the buying power of $512, based on average historical inflation.

For high net worth and mass affluent individuals, taking time to think about and plan for retirement is vital.  The keys to a successful retirement revolve around how much you spend, how much you have accumulated and how you invest.

As folks think about retirement, some are considering working longer or working part-time after winding down their careers.  Others are using their peak earning years to aggressively save and prepare for a long retirement.  Many do both.

Although we’ve come to believe spending and savings are the most important aspects of retirement, the third, and still vitally important, leg of the stool is investing.

Investing well is a necessity.  It isn’t an option.  At average inflation of 3.01%, a $100 purchase today will cost $181 in 20 years.  Investing is the best defense against inflation.

Long lifespans make investing for consistency more important than ever.  Taking big risks, succumbing to greed or fear, or being too conservative are all catastrophic mistakes.  Rather, it’s vital to craft a detailed retirement plan that will match your long-term goals with a consistent, repeatable investment strategy.

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