Living to 100 is a blessing, if you can afford it.
Financial experts around the country say Americans need to save hundreds of thousands, if not millions, of dollars for retirement, but much less of that conversation revolves around spending down that money — or stretching it to meet your lifespan and beyond. In some cases, people may even approach the concept of living past their life expectancy as a risk.
“You have to worry about getting unlucky and living to 100,” said Richard Thaler, a Nobel Prize winner in economics, during a recent Brookings Institution event.
Thaler is credited with adding nearly $30 billion to retirement accounts. His research, which earned him a Nobel Prize in 2017, focused on behavioral economics, and “nudges,” that get people to make smarter choices in their financial self interest, and ultimately contribute more money to their employer-sponsored retirement plans. His work included theories on auto-enrollment and auto-escalation, where companies automatically place their employees in retirement plans with a default contribution rate, and with auto-escalation, increase that rate periodically.
Auto-enrollment is a great benefit, financial experts say, but it may not be enough to quash the looming retirement crisis Americans are facing. Companies’ automatic contribution rates are a good start, and better than nothing, but at just a few percent are nowhere near how much Americans should be deferring into a retirement savings plan.
But calculating how to spend down assets can be even trickier than figuring out how much to save for retirement, Thaler said during the Brookings event. Although there’s no set figure for how much people need to save, they can consider factors such as: planning where they’ll live and if they’ll drive, cutting costs after retiring by downsizing homes or cars, finding out through the Social Security Administration how much they’ll get in benefit checks, and working longer or part-time to supplement any difference in how much they have versus what they need. Not always, but often, workers can even decide when to retire, such as at 65 years old, for example, Thaler said.
How long you’ll live and how much money you’ll need in retirement are unknown, he noted. “There’s nothing like ‘age 65,’” Thaler said. “You may know when you retire that you are in poor health and cash out and live it up, but no one knows that they are a high risk to live to 100.” They may also underestimate how much they’ll need for health care or if they’ll enter retirement with debt (which many are, thanks to mortgages and car loans, he added).
Americans are attuned to the retirement savings shortfall. The top retirement fear of 43% of older Americans was not having enough money, more so than being bored, lonely or even getting sick, according to a 2015 Transamerica Center for Retirement Studies report. Financial planners echoed that sentiment, with almost six in 10 saying that was the top concern of their clients, according to an American Institute of CPAs survey released the same year.
Withdrawing retirement assets can also be confusing. There are rules for when and how retirees can take money out of certain accounts, and neglecting those requirements can lead to penalties and extra fees. Retirees also need to balance how many accounts they have and the tax advantages of each — money in a Roth individual retirement account, for example, can be withdrawn tax-free at any point, whereas the income from traditional account withdrawals will be taxed. Many retirement accounts also include required minimum distributions after turning 70 ½ years old.
Aside from laddering accounts by how they’re taxed, there are a few other strategies retirees could take when in the withdrawing stage of their savings. Some may go for the traditional 4% rule, where investors withdraw only 4% of their portfolio value every year in retirement. Critics argue that is a very conservative approach that leaves a lot of money left over, however, and the rule of thumb also doesn’t incorporate other sources of income, including Social Security.
Part of the solution is a shift in perspective when planning for retirement, thinking of it as another phase of your life, as opposed to a few years between work and death, wrote Joseph Coughlin, founder and director of the Massachusetts Institute of Technology AgeLab. Retirees can easily expect to spend 20 years in retirement, almost the same time frame between birth and the legal drinking age, or midlife (mid- to late-40s) and traditional retirement age (65). As such, when saving for retirement, investors must consider they may actually live longer than they expect. “The point is retirement is not a brief period of life after full-time work,” Coughlin wrote. “Rather, retirement is equal to one-third of your adult life.”