Apr

14

The Retirement We Imagine, the Retirement We Live

Examining the potential differences between assumption & reality.

Financially, how might retirement differ from your expectations? To some degree, it will. Just as few weather casters can accurately predict a month’s worth of temperatures and storms, few retirees find their financial futures playing out as precisely as they assumed.

As you approach or enter retirement, you may find that your spending and your exit from your career don’t quite match your expectations. You may be surprised by these developments, even pleasantly surprised by some of them.

Few retirees actually outlive their money. If this was truly a crisis, we would see federal and state governments and social services agencies addressing it relentlessly. The vast majority of retirees are wise about their savings and income: they don’t spend recklessly, and if they need to live on less at a certain point, they live on less. It isn’t an ideal choice, but it is a prudent one. Health crises can and do impoverish retirees and leave them dependent on Medicaid, but that tends to occur toward the very end of retirement rather than the start.

You may not need to retire on 70-80% of your end salary. This is a common guideline for new retirees, but according to some analysts, you may not need to withdraw that much for long.

In the initial phase of retirement, you will probably want to travel, explore new pursuits and hobbies and get around to some things you may have put on the back burner. So in the first few years away from work, you might spend roughly as much as you did before you retired. After that, you could spend less.

Bureau of Labor Statistics data is very revealing about this. JP Morgan Asset Management recently studied U.S. household spending and found that it peaks at age 48. The average U.S. household headed by people aged 65-74 spends only 63% as much as a household headed by people aged 55-64. Additionally, the average household headed by people 75 and older spends only 72% as much as the average household headed by people aged 65-74.1

In the big picture, households run by those 75 and older typically spend about half as much per year as households headed by people in their late forties.1

Further interesting analysis of BLS statistics and retirement spending patterns comes from David Blanchett, the head of retirement research at Morningstar Investment Management. He sees a correlation between career earnings and retirement spending, one contrary to many presumptions. Comparatively speaking, he notes that higher-earning retirees commonly have to replace less of their income once their careers conclude. As he commented to Money Magazine, “the household that makes $40,000 a year might have an 85% replacement rate, and the household making $100,000 a year might need 60%.”2

Why, exactly? The upper-income household is watching its costs fall away in retirement. The home loan, the private school tuition, dining out due to convenience, the professional wardrobe, the car payment, the workplace retirement plan contribution – this is where the money goes. When these costs are reduced or absent, you spend less to live. Blanchett believes that the whole 70-80% guideline may “overestimate the true cost of retirement for many people by as much as 20%.”2

Your annual withdrawal rate could vary notably. Anything from healthcare expenses to a dream vacation to a new entrepreneurial venture could affect it. So could the performance of the stock or bond market.

You could retire before you anticipate. You may want to work well into your sixties or beyond – and the longer you wait to claim Social Security benefits after age 62, the greater your monthly payout. Reality, on the other hand, shows that most people don’t retire at age 66, 67 or 70: according to Gallup, the average retirement age in this country is 61. The aforementioned JP Morgan Asset Management study determined that less than 2% of Americans wait until age 70 to claim Social Security benefits. So if your assumption is that you will work to full retirement age (or later), you should keep in mind that you may find yourself electing to claim Social Security earlier, if only to avert drawing down your retirement savings too quickly.1

You don’t have to be a millionaire to have a happy retirement. In a 2011 Consumer Reports poll of U.S. retirees, 68% of respondents were “highly satisfied” with their lives irrespective of their financial standing. Backing that up, JP Morgan Asset Management found that retiree satisfaction increased only incrementally the more retirement spending surpassed $40,000 a year.1

The retirement you live may be slightly different than the retirement you have imagined. Fortunately, retirement planning and retirement income strategies may be revised in response.

 

Citations.
1 – reuters.com/article/2014/03/12/us-column-stern-advice-idUSBREA2B1R020140312 [3/12/14]
2 – money.cnn.com/2014/02/26/retirement/retirement-spending.moneymag/index.html [2/26/14]

This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is not possible to invest directly in an index. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world’s largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This material was prepared by MarketingLibrary.Net Inc., for Mark Lund, The 401k Advisor, Investor Coach and author of The Effective Investor. Mark offers investment advisory services through Stonecreek Wealth Advisors, Inc. an independent, fee-only, Registered Investment Advisor firm providing 401k consulting for small businesses and private investment management services for professional athletes and select individuals. Stonecreek is located in Salt Lake City, Murray, West Jordan, Sandy, Draper, South Jordan, Provo, Orem, Lehi, Highland, Alpine, American Fork all in Utah.

Share This With Others:
Facebooktwitterlinkedin

Category: Articles, Blog

About the Author ()

Mark K. Lund is the firm's founder, CEO and author of The Effective Investor, a #1 Best Seller. He has written articles for or been quoted in: The Wall Street Journal, The Salt Lake Tribune, The Enterprise Newspaper, The Utah Business Connect Magazine, US News & World Report, and Newsmax.com, just to name a few.  Mark publishes two newsletters called, “The Mark Lund Growth Report” and “Mark Lund on Money.”  Mark provides CPE (continuing professional education) courses for CPAs.  You may also have seen him on KUTV Channel 2, or as a guest speaker at a local association or business. Mark provides investment and retirement planning services for individuals and 401(k) consulting for small businesses. In his book, The Effective Investor, Mark exposes the false narrative magazines, media, big Wall Street firms, and most advisors want you to believe. The good news is that Mark will show you that you don’t need their speculative ways of investing in order to be successful. Get a free copy when you schedule your initial consultation.

Leave a Reply