Daily Gains Letter

Five Inconvenient Truths About Retirement

By for Daily Gains Letter |

DL_John_290113-150x88Even at the best of times, saving for retirement is not an easy task. Throw in economic uncertainty and low savings rates, and the idea of a well-fortified retirement plan can simmer away on the backburner, undisturbed for years. This may be a taste of things to come when you consider that Americans are retiring earlier, living longer, and saving less.

A recent report shows that the confidence of Americans in their ability to retire comfortable is at historic lows. Just 14% are “very confident” they will have enough money to live comfortably when they retire; on the other end of the scale, 23% say they are “not at all” confident. (Source: “The 2012 Retirement Confidence Survey; Job Insecurity, Debt Weight on Retirement Confidence, Savings,” Employee Benefit Research Institute web site, March 2012, last accessed January 29, 2013.)

And, approximately 60% of middle-class retirees will likely run out of money if they maintain their pre-retirement lifestyle and don’t cut spending by at least 24%.

Even though the majority of baby boomers view retirement as a crisis, few understand how much money they’ll actually need to retire. (Source: “Outliving Your Money Feared More Than Death: Allianz Life Study Reveals Boomers Guessing at Retirement Needs,” Allianz Life Insurance Company of North America web site, June 17, 2010, last accessed January 29, 2013.)

This disconnect is a recipe for disaster, and it makes investing for retirement more important than ever. The more people understand about how much they’ll need to retire in comfort, the more likely they are to act.

But first, there are five inconvenient retirement facts you should know if you want your golden years to be secure.

1. The average American could spend over 20% of their life in retirement.

With the average American expected to live until their late 70s, those who manage to stop working at 60 can look forward to spending 19 years, or roughly 24% of their life, in retirement. That’s a long time to plan for. At the same time, almost half of the population lives longer than the average life expectancy and will therefore need to have their retirement savings last a lot longer. For those who have difficulty saving for a one-week vacation…this is a sobering statistic.

2. Thanks to inflation, the value of the dollar gets cut in half every 22 years.

For nearly 100 years, U.S. inflation has increased approximately 3.2% each year. At that rate, prices double every 22 years. If you enter the work force at 20, you are likely to see prices double twice by the time you reach 65. As a result of compounding, that means an item you bought at 20 will be four-times as expensive by the time you retire.

Or, seen through the lens of retirement savings, if you are 20 and think that $50,000 is a reasonable amount of income in today’s dollars, you need to save enough retirement income to provide $200,000 a year by the time you reach 65.

If you live longer than the average American, chances are you could see prices double again during your golden years.

3. Record low interest rates mean fixed income bank accounts produce a fraction of the income they used to generate.

Those who are nearing retirement may be forced to take a step back. By taking “income” out of “fixed income,” the Federal Reserve has made retirement a pipe dream for many. By investing in bonds and Treasuries, those who are headed toward retirement could find solace in fixed income returns. They provide holders with stable retirement income; they know what their annual returns will be, and can therefore budget and spend accordingly.

Not anymore.

According to the Federal Reserve, in 2007, a $100,000 short-term certificate of deposit (CD) would have generated $4,780 in annual income. At the end of 2012, that same CD generated only $190.00 in annual income. For those who are planning for retirement, low savings account interest rates mean you have to save more than ever and live on even less.

4. Social Security averages just $1,220 a month.

When the Social Security program was first introduced in 1965, the typical retiree only lived a few years past their retirement date. Today, the average American will live into their late 70s; almost half will live longer.

During that time, the average American will receive an annual retirement benefit of less than $15,000 a year; or roughly $1,230 a month. That’s not much retirement income for anyone to live on. (Source: “Average monthly Social Security benefit for a retired worker,” Social Security Administration web site, November 28, 2012, last accessed January 29, 2013.)

If retirees want to live on more than Social Security’s $1,230 per month, they will need to find creative ways to increase their investment.

5. The national average cost of an assisted living facility is nearly $40,000 a year.

The cost of assisted living can vary significantly between facilities, and it can depend on the kind of service you want, too. But the national average comes in at a princely $3,300 per month, or $36,000 annually. That price climbs 5.7% every five years. (Source: “Assisted Living Costs,” Assisted Living Facilities web site, last accessed January 29, 2013.)

The national average for a single occupancy room in a nursing home is $6,753 per month, or over $81,000 a year, which is more than double the national average for assisted living. The cost of a single occupancy room increases 4.3% every five years. If you want to share a room, it’s only $6,083 per month, or roughly $73,000 a year, with a five-year increase of 4.5%.

A Social Security retirement income of $15,000 a year isn’t much of a security blanket; and it just goes to show why it’s important to supplement retirement income with some additional personal retirement savings and investments.

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  • https://www.facebook.com/lou.hoebel Lou Hoebel

    This is a bogus article with little in the way of fact or information.
    SS retirees in the 60's lived much longer than a few months past retirement ( of course many born at the dawn of the century did not make it to retirement).

    The average retiree has more than the $15K SS provides, some have a lot more some only as little.

    Save as much as you can, be as healthy as you can and avoid doctors and hospitals …they are the plague.