For most individuals in their 50s or 60s, the most daunting financial question is, “Do I have enough money to continue my lifestyle well into my 90s?” For some, the answer might be yes, but for many others, there is a big gap between the financial resources needed and what has actually been accumulated.
The importance of this question is the reason we created our companion educational website, www.fiftywealth.com—so that individuals still in their peak earning years can make the adjustments needed to change their retirement funding equation. We filmed a brief video earlier titled “Fast Forward the Movie” to talk about the connection between what you actually do today and the eventual outcome of tomorrow.
In times past, we’ve talked about the “three-legged stool” consisting of a pension, Social Security and outside investments. The grand majority of those approaching the Run-Up and Wind-Up stages (50s and 60s) don’t have pensions. Instead, most have 401-k plans (which, by the way, were never designed to fully replace pensions). Social Security is still there (at least for now) but making smart choices is imperative.
How Do Your Savings Add Up?
Many of you have seen “The Gap” whiteboard in the conference room. We keep it there so that we can easily pull it out because these questions are so pervasive. The idea is to provide a quick look at where you stand today in relation to where you want to be in the future.
“The Gap” is a simple four-part formula:
1. Money needed for living expenses each year.
2. Multiply amount in #1 by 20 (to reflect a 5% withdrawal rate—the upper end of the normal range).
3. Money you already have saved for retirement (excluding your home equity).
4. Number of months until you retire (this is for emphasis on monthly saving).
For example, let’s assume that you need $150,000 per year for living expenses (#1). This translates into $3,000,000 as the amount needed (#2). Let’s further assume that you have $1,200,000 now (#3) and that you plan to retire in 12 years (#4). “The Gap” is $1,800,000. You have 12 years to make up the difference through additional saving and appreciation of existing investments. Some future living expenses will be offset by Social Security, but skyrocketing healthcare costs for retirees reduces the impact this has for planning purposes. Recent studies estimate the out of pocket healthcare expenses for a retired couple at $250,000.
The main point of “The Gap” exercise is to spotlight the capital pool that will be needed, (an amount which always surprises clients), and further, to provide motivation for changing the inputs (saving, spending, time and allocations). The inputs are within your control, but what happens in the financial markets is not. You can save more, spend less, retire later, and take risks in your portfolio that correctly align with your goals.
The “enough” riddle can indeed be solved, but usually, behavioral adjustments have to be made. Ready for some changes? Ready for a real conversation?