There is no shortage of bad news about retirement: The population is aging. Workers haven’t saved enough. Market returns will be lower going forward. Inflation is bound to return. Health care is expensive….
Many of you, even those who are relatively well prepared, are concerned about the prospects for your golden years, afraid to make the retirement decision. I have my own share of fears.
Yet, amidst all the dire news, there are rays of hope, good reasons to look on the positive side. Indeed, my own retirement — now more than three years old — has gone better than planned. Our assets are larger now than when we started out, and our life is even a bit more comfortable than expected. Having arrived in our 50’s after our share of hard work and sacrifice, we have unprecedented freedom now to do things exactly as we wish.
I don’t intend to let my guard down. We’re still watching our budget and living carefully in these initial years of early retirement. But it’s encouraging to be ahead of the game, at this point. So let’s explore some of the reasons why we, and you, can afford to be optimistic about retirement….
Happiness Is Independent of Spending
Let’s start with the big news that is old news, to many of us: You can be happy with less. That’s right. You don’t need to own a lot or spend a lot to be happy. Looking back at my own life, I see surprisingly little correlation between money and happiness. From my student days to early marriage, child-rearing, middle age, empty nest, and ultimately financial independence, happiness has been related to many other factors. Spending, after a certain comfort level is reached, is one of the minor variables, in my opinion.
Now this fact is being confirmed in retirement. Surveys of actual experience show that most retirees are happy, even though they are generally living on much less than they did while working. The average replacement rate — the percent of previous income needed once retired — for today’s retirees may be as low as 60%. Not only are work and family-related expenses gone once you retire, but you may be done keeping up with the Joneses too. In one study, 85% of recently-retired households confirmed that they don’t need to spend as much as they did before retirement to be satisfied.
In my experience, people are tempted to spend more on possessions and experiences to ease the pain of jobs and careers that no longer provide meaning in their lives. Transition into semi-retirement, and the need for spending on these surrogate painkillers goes away.
Living on less in retirement, flexibility is required to preserve assets in the face of economic changes. But, rather than perceiving that need as a threat, retirees are accepting and embracing it. One study found that 60% of retirees preferred to reduce their income to adapt to swings in the financial markets rather than continue blindly withdrawing a fixed sum from their portfolios.
Many of us are ready and willing to adapt our lifestyles to economic conditions, so long as our basic necessities are met. Change can be good, and it will probably be inevitable over the course of lengthy modern retirements.
Expenses are Likely to Decline with Age
So you can spend less in retirement than you did while you were working, and still be happy.
But there is more good news: you will probably spend less as retirement progresses, because most people don’t need as much as they age. This is only natural. Early in retirement you’re more likely to be relocating, traveling, spending on luxuries you missed when you were too busy working to enjoy them. Later in retirement you are more likely to be settled in your lifestyle. And, later still, with changing health and energy levels, you are even less likely to be actively consuming. I saw this first-hand in my family. As relatives reached their 80’s, they weren’t out shopping for furnishings or traveling the world. Their lives naturally became simpler, more constrained, more focused at home.
Government figures back up these impressions. The Q2 2013 Consumer Expenditure Survey from the Bureau of Labor Statistics, finds average annual expenditures peaking at about $61,000 for the 45-54 year age range. Then, expenditures fall off steadily with age. Average annual expenditures for those 55-64 years are about $56,000; at 65-74 years they are about $46,000; and at 75 years and older only about $34,000.
A 2012 study from the Employee Benefit Research Institute found a similar pattern. Household expenses declined steadily with age. Using the age 65 expenditure as a benchmark, household expenses fell by 19 percent at age 75, 34 percent at age 85, and 52 percent at age 95.
What does this mean for the average retirement plan, which generally assumes constant annual expenses? As explored in my Constant Retirement Withdrawals: Realistic or Not?, that’s probably not a realistic assumption. And, it isn’t rocket science to realize that, if you’ve planned on a steady level of expenses, but your actual spending tapers off as you age, then you’ll probably wind up with more money than you expected in retirement!
While analyzing previous work on this topic in Advisor Perspectives, retirement researcher Wade Pfau concluded that lower spending needs over time could result in sustainable withdrawal rates that are between 1.3% and 2.4% higher than those required for constant inflation-adjusted spending. In other words, the classic 4% Rule could actually get hiked up by a percent or two. According to Pfau, this might even imply that you could begin your retirement with as much as 25% less wealth.
Am I suggesting that you bank on this analysis and make the retirement leap even sooner, or with less assets than generally recommended? No. There are some technical arguments for why the news might not be quite that good. And then there is a significant caveat regarding health care — the one spending component that generally does not decline with age. The EBRI study showed that, while health care expenses are around 10 percent of the budget for those aged 50–64, they increase to about 20 percent of the budget for those age 85 and older. If health care inflation were to greatly exceed your other expense categories, or you were to have serious health or long-term care needs not covered by insurance, your overall expenses could certainly increase as you age.
Nevertheless, I tend to think, for most of us, that total living expenses will decrease as retirement progresses. But, I would suggest considering this a “bonus” if it materializes in your life, not a required element of your retirement plan in order for your money to last.
Health Care is Available
So the news on your overall spending in retirement is encouraging: It’s likely to decrease, and you’ll probably be perfectly happy. But health care remains a wild card. The expense and availability of health care is certainly among the very top worries of those approaching and entering retirement. I know it figures in the majority of reader survey responses that I receive here. We’re all concerned about the costs, and rightly so.
But, since I started this blog nearly three years ago, there is a new development in the U.S.: Obamacare. Whatever the political and economic prospects for this new government program, the fact remains that many people who could not get coverage before, now qualify, because of the new rules for preexisting conditions. My own retirement in 2011 simply would not have been possible without my wife’s public school teacher health insurance benefits. But, if I were retiring today, I would have a new option. And, as I reported earlier in Shopping Obamacare: Good Deal for Retirees?, it appears to be a viable option, at least in our state. Though we have elected to stay with my wife’s plan for now, since Obamacare is so new and offers no great advantage to us, I suspect I would have happily applied, had health insurance been the missing link in my early retirement.
Aside from the financial concerns, aside from the fact that growing old isn’t easy, aside from the fact that we must navigate an increasingly complex health care system, we’d do well to remind ourselves of our great fortune to live in this era with its many health care options. Most of us can look forward to more productive and more comfortable years, thanks to modern science and technology. They don’t solve all the problems of aging, and I doubt they ever will. But, I can already see how much better off I am than somebody of my age living less than a century ago. Research confirms that “disability-free life expectancy” has been rising, with disability being compressed into the period just before death. We can’t escape our ultimate fate, but the rest of life is generally longer, and better, these days.
Social Security Will Endure
it’s fashionable in some circles to discount Social Security. The bias is so pervasive that younger generations seem to think Social Security will be completely gone by the time they retire. But, when you look at the facts for those nearing retirement now, you see that Social Security will be a key part of retirement for most of us.
It’s true that Social Security is in trouble. My latest Social Security statement tells me that “Without changes, in 2033 the Social Security Trust Fund will be able to pay only about 77 cents for each dollar of scheduled benefits.” That doesn’t sound good.
But it’s highly likely that Social Security will survive in something like its current form. For one thing, note carefully that it is good for almost 20 years even if the politicians do nothing. And they’ll probably figure out a way to kick the can further down the road before then. Given the boomer generation’s experience of two stock market busts in just the last decade, it is almost inconceivable that a majority would support removing the guarantees associated with Social Security. Boomers will be a formidable voting block in their later years, and would surely overrule any attempts to radically change or gut Social Security. Finally, realize the changes needed to fix the program, though politically unpalatable, are relatively modest. Theodore Roszak, in his book Longevity Revolution: As Boomers Become Elders, projects that if the payroll tax were increased just 1 percent each for employees and employers, it would be enough to keep Social Security solvent through the rest of the century.
So Social Security should be around for a couple of decades in precisely its current form, and probably long after that in something like its current form, maybe with somewhat reduced benefits — possibly in the form of older retirement ages or reduced cost of living adjustments. So, in my view, it would be as foolish to ignore Social Security’s potential contribution to your retirement as it would be to rely solely on Social Security payments for your well-being.
Part-Time Work is Available and Rewarding
What if you need even more income in retirement? What if you retire early and need something more to do with your time, or you want to ensure your money will last over a retirement that could conceivably stretch four decades?
The good news is that there is a simple solution: work part-time in retirement. Yes, in the traditional model, people retired after a full career and played golf for the rest of their lives. But we are no longer in a traditional retirement world. Baby boomers expect to live longer, healthier, more active lives. Many of us want to keep contributing in meaningful ways, even when we are no longer part of the full-time work force.
Working part-time in retirement is a potential solution. But working in retirement is different than a full-time career. The commitment, pressure, obligations, and rewards, are all less. And that’s for the better. Ideally a part-time job in retirement will be something new, creative, and meaningful for you. Without the requirement for a full-time paycheck, you can be more generous with your time and effort. You’ll find that people appreciate that. You might even have fun!
And the impact of some modest part-time income on your retirement picture, can be substantial. Using the traditional 4% Rule as a multiplier, if you earn just $1,000 a month, that’s the equivalent of an extra $300,000 in retirement savings. And, it’s a lot easier to find a job that produces $1,000/month, than it is to save $300,000.
While working in retirement is still not the norm, it is on the rise. The Bureau of Labor Statistics reports that the labor force participation rate for seniors nearly doubled from 1990 to 2011. And workers 55 and older logged 42% more part-time hours than they did 10 years previously. Whether this is by necessity or by choice, and how you feel about it, is up to you.
An informal survey I did of motivated retirees a while back indicated that the majority had no difficulty finding enjoyable part-time work in retirement. In many cases, the work found them: Opportunities for extra income are likely to appear as you go about your usual activities. Hobbies, volunteer work, and past professional contacts can all produce interesting leads. Without financial pressure, you can bide your time until the right opportunity appears, then say “yes,” and give it a try.
Inheritances May Provide Some Cushion
So Social Security and part-time work can both produce reliable retirement income. There is another source of retirement assets that I would not count on, but that still may well appear in your life….
It’s probably not wise to plan on an inheritance, factoring it into your financial planning in order to cover essential expenses in retirement. (Needing a parent to pass away for your own financial security is unpredictable at best, depressing at worst.) Yet the fact is, many of us will receive inheritances, of some sort.
I think the best approach is to prudently plan for financial independence using only those resources directly under your own control. But don’t work forever to build in an increasingly unnecessary margin of safety. Expect there will be some bad financial news in retirement, along with some good news, and they’ll probably cancel each other out. In the good news category, I include inheritances that will enhance your security if they materialize, but won’t detract from your lifestyle if they don’t.
There are statistics for the “average” inheritances that baby boomers will receive. But this is one area where statistics seem more useless than usual. Estate details are going to depend on your exact family situation and on how family members beyond your control have lived their lives. While there may be rare circumstances where you can plan on when and what you will receive, in the vast majority of situations I think it’s best to plan on receiving nothing. You can then be pleasantly surprised if and when an inheritance shows up.
A Win-Win Situation
The bottom line, in my opinion, is that those who have lived prudently and made a reasonable effort to save, are likely to be pleasantly surprised by most of the realities of retirement:
You’ll probably find, even if you need to spend less, that there is no corresponding decline in happiness. In fact, you might be happier. As you age, your expenses will naturally decrease, removing some financial pressure. Modern health care has the potential to deliver more active and more comfortable years nearer to the end of life. Social Security will likely endure and continue to provide significant income. And, if that’s not enough, or you need some meaningful activity, part-time work is likely to be available. Eventually, some amount of inheritance may show up, though we’d be wise not to count on it.
Finally, we can enjoy this good news in retirement for longer: Thanks to modern science, health care, and technology, life expectancy in the U.S. has been rising steadily for decades.
Of course, from a financial planning standpoint that longer life expectancy represents “longevity risk.”
But, not to worry. You’re either going to live longer and have more life to enjoy, or you’re going to die sooner and sidestep those pesky longevity-related financial issues.
It’s a win-win situation. What’s not to like?