Another Retirement Warning for Boomers

One of the most challenging aspects of retiring today is fully comprehending how long this period of your life could be. The implications are profound. And scary.

In other words, profoundly scary.

Based on census data from 2000, if you planned on living to an “average” life expectancy, the Society of Actuaries (SOA) calculated that would be age 85 for a male who was 65 that year (2000) and 88 for a female. 

But here’s the problem: By definition, “average” means half of those who meet these criteria will die before they reach their “average” life expectancy, and the rest will live longer. So if you only plan on your money lasting for an “average” retirement, you’ve got a 50% chance of outliving your assets. 

What length of time should you plan for? According to the SOA, if you were age 65 and male in the year 2000, you have a 1 in 4 chance of living to age 92; the same odds for females puts you at 94. Thus, at the very least, you should expect your savings to cover a 30-year retirement.  

Thirty years in retirement?! Correct. 

That’s like living half your life over again. 

Unfortunately, our brains don’t seem to be wired to think and plan that far out. That’s one reason we underestimate how much money we’re going to need when we have to start generating our own “paychecks” to replace the ones we received from our former employer. 

“People have two, three, four hundred thousand in their 401(k) and they hope it will last the rest of their life,” says Steven Vernon, one of the actuaries who oversaw the latest report from SOA. He adds, “Hope is not a good strategy.”

Another factor that contributes to underestimating how large a nest egg we need and over-estimating how much we can spend is something called “The Law of Small Numbers.” In a nutshell, it means that a tiny amount–such as inflation–compounded over a large period of time, such as two to three decades, can have significant consequences. 

On an annual basis, 3% doesn’t sound like much. But if you have 3% inflation year after year (the average is 2.9% over the past 25 years) after 24 years you’ll need twice as much retirement income just so you can afford the same lifestyle you had when you quit work. (Never mind that medical expenses tend to increase at a much higher rate than general inflation.)

But there is good news. According to Vernon, baby boomers that responded to SOA’s latest survey said they are very concerned about the impact of inflation; 72% said they are taking it into account when they do retirement planning

None the less, the SOA’s report concludes that, in reality, far too few boomers are actually doing any planning. Instead, they are essentially flying blind and taking their chances. “…people are far from rational, planning inadequately, if at all, then scrambling to adjust as they approach retirement with funds inadequate to support their expectations.”  Many expect to retire at the same age as their parents did even though “things have changed since their parents retired.”

“You need to have a plan,” advises Vernon, who has just launched a free guide for retirees, . He admits you might get sticker shock at the price of what retirement will cost, but adds that, if possible, working a couple of years longer than you expected can make a big difference. 

“It doesn’t have to be the same kind of work or at the same pace. Even if it’s just part-time and pays the bills so you can delay drawing on your financial resources” (Social Security, retirement accounts), you will have improved your financial situation.

Although baby boomers are the most educated generation to head into retirement, don’t feel as if you have to do this on your own. In fact, you’re probably better off seeking outside advice; it’s natural to get emotional when you’re dealing with your own money and that’s when you’re liable to make dumb mistakes. An unbiased, experienced financial advisor can be invaluable. 

Vernon has seen first-hand how easy it is for seemingly bright, educated individuals to screw up their retirement finances. He says a close family member who retired as treasurer of a Fortune 500 company overestimated how much of his nest egg he could spend. “He lost his house. At 75 he’s driving a truck, making deliveries.”


Ms. Buckner is a Retirement and Financial Planning Specialist at Franklin Templeton Investments. The views expressed in this article are only those of Ms. Buckner or the individual commentator identified therein, and are not necessarily the views of Franklin Templeton Investments, which has not reviewed, and is not responsible for, the content. 

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