Today’s entry will revolve around figuring out how much individuals or couples will likely need at retirement. This is somewhat tricky to explain simply because, due to inflation, the amount needed in 2013 for a retiree is different than the amount you and I will need at retirement between the years of 2043 for the oldest Millennials and 2063 for the younger Millennials. So how much will it cost us and how much do we need to be putting away to reach these goals?
Let’s use history as a benchmark for predicting our future. According to the investment company, Vanguard, since 1960, inflation has increased 4% on a yearly basis. Vanguard goes on to say the following:
“…if you had invested $2,000 annually for 40 years and seen an 8% annual return on your investments, your total savings of $513,113 might only buy $112,234 in goods and services today.”
This should come across as somewhat alarming. Especially considering the steep increase in healthcare costs we hear about daily on the news regarding senior citizens. Additionally, there is no reason to think this inflation rate is going to trend down anytime soon; on the contrary, there are many reasons to suggest this average increase in inflation will rise going forward. With that in mind the $112,234 from above would actually be lower. So let’s get real about this investing thing and figure out where we need to go from here.
Let’s borrow from the bestselling book “7 Habits of Highly Effective People” for a moment and use the habit of “Starting with the End in Mind.” This is a goal-centered habit, and the best goals are spun out of envisioning the entire project we want to take-on, and proceeding to envision what we want that project to look like at the end. Then, simply work backwards. So we need to establish goals derived from the end of our time on this earth. Somewhat morbid, right? Well, so be it; there’s no real way to sugar-coat it. So let’s consider the facts:
- A 65 year-old has a 50% chance of living past 85 according to Wells Fargo’s Retirement Dept.
- Of those living past 85, unless they have a health condition or family history indicating otherwise, they are expected to live another 6 1/2 years according to Wells.
- Average lifespans are increasing.
- The average retiree, starting at 65, will spend on average $200,000 on medical expenses not covered by Medicare according to Maliz Beams of TIAA-CREF.
- A government report indicates Medicare will be bankrupt by 2018.
- Retiree’s keeping their retirement account invested at 50/50 between stocks and bonds have at least a 90% chance of not running out of money IF they withdraw no more than 4% of that savings/year for a 30-year time span.
- It wouldn’t be unheard of if Social Security Benefits didn’t exist for us once we retire.
- Medical Expenses are typically at their highest during retirement
So starting with the end in mind, let’s project that we will all live to be 95 or 30 years of retirement. I know, the CDC is now reporting the average life expectancy is 79 years of age. But does anyone really want to rely on the average? Roughly half of the population will live to be older than 79, so if you plan based on the average, it’s a coin-flip as to whether you’ll outlive your money or not. So let’s plan on age 95 for all the reasons already mentioned.
So let’s sum up in one paragraph and a few bullets how you should plan to invest. For some reason it seems like I’ve heard experts say $2,000,000 is the magic number to shoot for in retirement. You may have heard the same thing as me, and I’m confident that isn’t a high enough figure. For instance, the equivalent of $2,000,000 in today’s money will buy you the same amount of goods as $4,683,750.88 will in 2043 (the year when the youngest Millennials will start retirement). To put it another way $2,000,000 saved in 2043 will buy you the same amount of goods as $821,045.89 will get you today. Are you starting to get the picture? Withdrawing 4% of $2,000,000 per year is $80,000/year. This probably would be enough for today’s retiree, probably, but again consider all the unknowns of Social Security, Medicare, and the possible increase in average inflation. Those retiring at 2043 withdrawing 4% per year of the $4,683,750.88 mentioned above is $187,350. Sounds outlandish right? That’s only because we’re not there yet. Trust inflation history and start considering this reality. Even if this ends up as more than what you need, what is the worst that could come of saving this kind of money? You get to pass it on as an inheritance, to Church/missions, charity, or any other way you could choose to do so in a will. The alternative is to run out of money and depend on others to supply your expenses. I’ll take the former.
How do you get there? We’ll discuss that in part 2 of this series which is soon to come.
Enjoying the ride with you,