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September 2, 2015
There is no shortage of retirement income advice. And, anyone can make a prediction about how much you will need for a secure retirement. Much of this guidance is based on sentiments that have more or less stayed the same for at least a few generations.
But what if that advice is wrong? It might have been right for your parents. It might even be right for your best friend. But if the advice is wrong for you, then your future is in trouble.
Traditional wisdom can be fine as a guideline or a starting point. But as your retirement plan matures, you’ll want to deeply evaluate which assumptions it’s based on and whether or not they’re likely to hold true for you.
But don’t let any of this send you into a panic. Even if you’re not spot on about how much you need to retire, you’re still probably on a reasonably good path.
Chances are, no one will prove actuarial tables right.
Longevity is Changing Fast
One of the biggest factors in retirement planning and how old advice no longer holds true is the rate at which Americans are living longer. Life expectancy is usually based on the IRS actuarial table, which is nothing but an average.
Money Crashers says the problem with averages is that practically no one hits the life expectancy mark. Some people will have a shorter lifespan. Many will live much longer. So averages don’t help anyone predict life expectancy, which is a large part of what savings goals are based on.
What’s more, the older you get the more your life expectancy increases. At 60, there’s a reasonably good chance that you’ll live to see your 90th birthday.
So make sure that your retirement plan uses a life expectancy number that you are comfortable with. You don’t want to have the good fortune to find yourself as a healthy 97 year old without any money left.
Inflation Has a Broad Effect
When most people think about inflation, the price of a gallon of milk or a loaf of bread come to mind. That’s the classic reference. But inflation affects a lot more than what everyday necessities cost, and the effect is a lot broader than you might realize. And inflation isn’t predictable, anyway.
Inflation alters compound growth, which Money Crashers explains can have far-reaching effects. But if you use the classic 3 percent inflation estimate, you might get an unpleasant surprise in the long run.
During the decade of the 70s, inflation caused prices to double. So the past isn’t a good indicator of what’s ahead. Try out a retirement calculator and adjust the standard 3 percent to a higher number, and see how different your retirement income needs can be with just a slight change in inflation.
Maybe you’ll take up a new hobby, but maybe not.
Spending Estimates Might be Inaccurate
Many retirement planning articles recommend that you plan to spend 80 percent of your current income, with inflation accounted for, when you retire.
However, many people are raring to go and ready to take on all of the fun things they’re planned for their whole lives. As a result, they spend a lot more when they retire than they did while they were working.
Spending might decrease if you slow down, but medical spending may increase substantially with age. While you’re saving money on things like travel and hobbies, you might spend more overall once you consider medical expenses.
CNN Money says that the 80 percent goal is perfectly fine for the bulk of your saving years. It gives you a reasonable target to think about, and it’s not so far off the mark as to leave you elderly and destitute one day. When you’re within about 10 years of retirement, you can finesse and make it more precise.
Slightly Inaccurate Retirement Advice is Probably Better than No Advice at All
While this article highlights potential retirement planning mistakes, the reality is that if you are planning — even if using slightly inaccurate information — you are better off than those who do not plan at all.
Saving for retirement is good, especially when you consider how many people don’t start until late in life. And while there are plenty of reasons beyond these to rethink traditional wisdom, the fact remains that any goal is better than none at all.
NewRetirement helps you sort out all of the confusing elements of saving and investing. Try out our retirement calculator, and you can see for yourself how factors such as lifespan, inflation and projected spending can alter your whole perspective. Your current plan might not be perfect. But you have the tools to make it better.
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