Recently, someone asked me what questions I hear most from people getting ready to retire. I recited the usual list of concerns that I hear from people. The follow-up question surprised me. The person then asked what questions I thought people SHOULD ask before retirement. When I simplify the answer, there are really two main questions that I think anyone should be able to answer before they retire.
The first question is simply how long will my retirement last? I get that it may seem like a morbid question because, ultimately, we’re asking questions about mortality. This isn’t a topic that many people are comfortable discussing. However, it is crucial to answer this question in order to answer the second question appropriately.
According to JPMorgan’s Guide to Retirement, a 65-year-old man today who is in excellent health has a 46% chance of living until age 85. A non-smoking, healthy, 65-year-old woman actually has a 72% chance of living until age 85, and the average woman has a 57% chance of living until that same age. The reality is that a healthy, non-smoking 65-year-old woman has a 54% chance of living until age 90. Of course, if you are married, your financial plan involves planning to cover expenses for the last to die. In that case, there is a 46% chance that a healthy 65-year-old couple will have at least one spouse alive at age 95. This means almost half of these couples need to plan for a 30-year retirement!
This time horizon leads to the second question, which is simply how will you get money in each of those retirement years? By the way, answering this question presumes that you know how much you will spend throughout retirement. For many people, the simplest answer is seemingly to claim Social Security at the earliest possible age and then try to make ends meet with everything else. Others believe that you should ALWAYS delay taking your Social Security until age 70. The reality is that the answer is dependent on several factors. Also, solving for Social Security is only one of the issues that needs to be addressed in retirement.
Every year of the retirement equation is essentially an equation where we want to provide money without imperiling future cash flows. Of course, to do this, we have to assess all available sources of income. Sure, you have Social Security, but you also have the ability to work part-time early in retirement. You will also need to balance the distributions out of various investment accounts to limit the overall lifetime tax bill that you will pay.
Hypothetical Example:
Let’s imagine that every year in retirement is a bucket of money that we will need. Let’s assume that you spend about $67,000 per year at age 65. Believe it or not, your spending by age 70 is actually expected to decrease to around $64,000, and by age 90, it has dropped on average to $50,560. It is worth noting that any financial plan should account for custodial care that may be necessary as you age. While the average amount does reflect healthcare costs, there is a lot of variability around this number.
Now, most financial plans don’t take into account a decrease in spending. In fact, we assume that spending will stay flat and simply increase with inflation. For simplicity’s sake, let’s assume that we need to spend $67,000 annually for 30 years (adjusted for inflation). In a year, each spouse wants to stay active and work part-time. The “part-time” work actually generates $47,000 of the required $67,000. So, the other $20,000 may come from our own assets (a blend of Taxable and IRA Accounts).
By age 70, neither spouse is working, and both are fully retired. They are now both claiming their Social Security Benefit. The combined Social Security amount is $35,000. The next withdrawals are split again between IRAs and Taxable accounts to lower the LIFETIME tax bill. By age 72, RMDs may force additional money to be withdrawn from the IRAs, so we are seeking to lower this impact.
Let’s imagine that we fast forward to age 85. Our retired couple has slowed down, and one of them may have passed. In that case, only one Social Security paycheck is still coming in. Maybe the coupe planned for this scenario by purchasing an annuity that only began payouts starting at age 85. This allowed them to spend more freely early in retirement, knowing that this cushion was in place.
The point is simply this: the money that funded life at age 85 looked different from the money that was used at age 65 or even at age 75. Also, this couple may have made different choices than a couple with similar assets and goals. There is not a single right answer to many of these complex questions. However, there is likely an answer that brings you and your spouse the most peace. Simplify your life today by finding the answers that may be right for you by working with a team. Connect with us here today!
Michael French
Head of Investments at 49 Financial
