Living Longer is a Risk?

February 1, 2007

I begin writing this entry tonight with an admission that it is hardly a subject that we can cover completely, much less solve, in a few paragraphs. The importance of addressing the fact that you may outlive your assets is neither pleasant, nor is it something we want to admit, but we must focus on planning and managing our retirement resources in a manner that they do not expire before we expire. Boomer retirees have prepared themselves for a retirement similar to that of their parents and older relatives. They do, however, tend to underestimate the gains in life expectancy that have happened during their lifetimes. As a result, many boomers are now in danger of outliving their assets.

I recently read a paper put out by the AARP that covered the four pillars of retirement.
1. Social Security
2. Pensions and Savings
3. Post Retirement Earnings (think Wal-Mart greeter)
4. Health Insurance (both adequate and affordable)

Sadly, for the majority of retirees, Social Security is the foundation of their retirement, representing the only guaranteed income that most will have. According to the SSA, nearly 2/3 of beneficiaries get more than half of their income from Social Security. With this years COLA adjustment, the average benefit will now be $1044. Less than half of working Americans today have a pension plan, and less than half have no regular payroll deduction savings as well. I just heard on NPR's marketplace, that today consumer savings reached their lowest level (-1% if you can imagine) since the great depression of the 1930's, and many have retirement savings far less that sufficient to live in retirement three decades or more. The baby boomer set also carries the burden of having the most debt in addition to their lack of retirement resources. Many boomers will be blindsided, not knowing until it is too late that they have not saved enough to live a comfortable retirement.

Perhaps the largest concern for newer retirees, and an increasingly alarming statistic, is the declining number of employers offering health benefits. This is probably the most overlooked area of retirement planning, and one that could add anywhere from $400-$750 per month to adequately insure. Not mentioned in this pillar is long term care costs which many mistakenly believe are covered in their medicare.

Finally I will focus on the effects of inflation, which most only consider in passing as a line on the retirement calculators that we sometimes like to use. Most , savings, and other guaranteed sources of income (annuities e.g.) do not have COLA adjustments. Inflation that has been running at the average 3% rate we've seen in the last year will cut purchasing power in half over the course of a 15 year retirement. The danger, especially for those who depend solely on Social Security for their income is obvious.

Feel free to add your comments, or corrections where I am wrong. I will discuss in more detail the problems facing the boomer set regarding inflation in future posts. We are all going to retire at some point in our lives whether we choose to or not. Simple changes made early enough can have a profound impact on the happiness you will feel later in life. Simply put, save as much as you can, work a few years longer than you thought you would, and for God's sake pay off those credit cards! Links to Dave Ramsey are on the right. I highly recommend you visit his site.

Until Tomorrow