Let's face it -- we're often really lousy at making judgments about ourselves. In their book Nudge, behavioral economists Richard Thaler and Cass Sunstein note that 90% of all drivers think their driving is above average, and 94% of professors at large universities think they're better than the average professor. But when it comes to finances, such an unrealistic outlook can lead you to serious trouble.
A recent study from Ameriprise Financial found that while financial planners in general recommend that we plan on our retirements lasting around 30 years, most folks plan only on 20 years. Statistically speaking, that's actually not too unreasonable. If you're a 65-year-old man retiring today, you have, on average, 18 years of life remaining, taking you to age 83. Women of the same age have 21 more years, to 86.
We're not insurance companies
That kind of information can help insurance companies average the life spans of all their customers, and plan accordingly. But you're not an average, and your life won't neatly fit that statistical model.
Remember that 20 years is just an average; you may end up with only two years left, or 32. If you plan for 20, you could end up outliving your wealth. It's estimated that there are about 55,000 people in the U.S. aged 100 or older, and those aged 85 and older are the fastest-growing group of older Americans. It may not be likely that you'll die at age 105, but it's far from unthinkable. And if it happens, your retirement may have lasted 40 years.
Running the numbers
While many people may be planning on a 20-year retirement, a whole lot of them aren't saving enough even for that. According to the Employment Benefit Research Institute (EBRI), more than 40% of Americans risk running out of money in retirement. Among the lower half of the income spectrum, more than a fifth will run out of money after 10 years.
That's a bad enough scenario if your retirement is 11 years long, but it's even worse if you end up living to 95 and have 30 years of retirement. The good news, though, is that you can take steps now to position yourself for a much better retirement. You may well end up living comfortably for 30 golden years.
Hope -- and plan -- for the best
Obviously, you can improve your situation by working a little longer, saving more, and investing effectively. But those aren't the only steps you can take.
Aim to build a nest egg that depletes slowly, if at all. Plan on conservative withdrawals from those savings each year. During the market's headier days, some people thought they could safely withdraw 5% or 6% annually; most of them were wrong. Retirement expert John Greaney's research suggests that withdrawing 3.5% annually can make your nest egg last 40 years.
That will still require you to have invested your retirement assets effectively, so that they'll continue to grow to some extent during your retirement. You can remove a lot of that work and responsibility by spending some or most of your nest egg on an immediate fixed annuity. A 65-year-old man, for example, can buy close to $2,000 of income per month -- for life! -- for $300,000. It's not cheap, but it can offer substantial peace of mind.
Plan now, and start saving and investing accordingly. Conservative projections could help you laugh all the way to the bank at age 98.
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