Why Your Lifespan Could Bankrupt Your Savings
As we're approaching the end of 2023, we have been reflecting on how retirement planning has evolved. Unlike previous generations, many often don't have the security of company-sponsored pension plans. Now individuals bear a responsibility to save for what could be a long retirement.
Saving for a Longer Life
Let us say you're aiming to retire at 65 and live until you're 90 or even older. To make your savings last and cope with the effects of inflation you will need to sustain yourself for an extended period. Consider this scenario - You have $500,000 saved up by the time you retire. A common approach is to withdraw 3 or 4%. At a withdrawal rate of 4% that would be $20,000, per year. However, if you end up living until 100 years old this amount might not be sufficient anymore. This highlights how important it is to continue saving and allowing your investments to grow.
Preserving Purchasing Power
Over time inflation gradually reduces the value of your money. When it comes to pensions, they often don't account for the rising cost of living and relying on fixed income sources can result in a decrease, in real income during a lengthy retirement.
Example Calculation 1
For instance, let us consider a retiree receiving a monthly pension of $3,000. Assuming an inflation rate of 3% after 30 years that $3,000 would only be worth approximately $1,646, in terms of purchasing power. To combat this situation effectively, it becomes important to maintain an investment portfolio that focuses on growth.
Medical Expenses – An Unpredictable Variable
While it’s great that people are living longer it also means that there's a chance of facing medical bills. It's vital to plan for healthcare expenses considering both costs and the possibility of needing long-term care.
Example Calculation 2
For instance, the expenses associated with long-term care can vary significantly. Let us say we estimate a cost of $70,000. If you end up needing this kind of care for 10 years that adds up to $700,000. Without planning these expenses could quickly deplete your savings. That's why it's so important to consider options, like long-term care insurance or other strategies to mitigate these risks.
Working Longer Is A New Retirement Strategy
Given the increase in life expectancy more and more people are considering the possibility of working beyond the retirement age. This not only provides a means to continue earning money. Also allows for a delay in using up retirement savings. Now I am not advocating for working into your eighties like some current presidents, but it is an option that needs to be taken into serious consideration especially if you have started your retirement savings journey late.
Example Calculation 3
For instance, let’s say you initially plan to retire at 65 but decide to work part-time until you turn 70 instead. By doing you could potentially earn $20,000 per year during those extra five years. This extra income, combined with the decision to postpone dipping into your retirement savings can have an impact on ensuring the long-term sustainability of your retirement fund.
Balancing Risk and Return
It's worth reconsidering the held belief that people should adopt a conservative investment approach during retirement. To mitigate the risk of running out of money it becomes important to strike a balance, between generating income and pursuing growth.
Example Calculation 4
Let us imagine two scenarios; one with a balanced portfolio that provides an annual 3% return and another with a more risk-taking portfolio that aims for a 6% annual return. Over the span of 30 years, the riskier portfolio despite its ups and downs has the potential to significantly outperform the balanced portfolio. This can help establish a financial footing during later stages of life.
Wrapping Up
Planning for a healthier life requires a holistic approach. It's important to save and account for inflation prepare for costs think about working longer and have a well-balanced investment strategy. This way you can ensure you are adequately prepared for the journey of a long fulfilling life.
Thank you for reading and hope you have a good rest of the day!
Follow me on these other platforms where I also post my content: Publish0x || Hive || Read.Cash || Noise.App || Twitter|| Torum