Guide to Retirement

As an experienced financial planner, I always look forward to J.P. Morgan’s annual Guide to Retirement. This comprehensive guide provides valuable retirement data that can help us make informed decisions and reach your financial goals. The guide focuses on retirement-related charts, but don’t dismiss it if you’re younger. It provides useful context for our long-term planning conversations and helps you understand what it takes to navigate a successful retirement.

To save time, I’m sharing the twelve most relevant charts for our planning conversations. However, if you’re interested, I recommend reviewing the full guide.

YOU’LL PROBABLY LIVE LONGER THAN YOU THINK

Most people expect to live until the average individual life expectancy of 82 years for males and 84 years for females. However, this assumption can be misguided. Joint life expectancy, the age at which the longest-living spouse would pass away, is a crucial actuarial concept that most people overlook. A non-smoking couple in good health has a 73% chance of at least one spouse living to age 90, a 46% chance of living to 95, and a 19% chance of reaching 100 years old! It’s important to remember this when planning your retirement finances, as the probability of requiring an income well into your 90s is much higher than most people anticipate.

As your financial planner, I encourage you to think about the long-term and plan accordingly. By using the valuable information provided in J.P. Morgan’s Guide to Retirement, we can make evidence-based decisions that help ensure your financial success throughout your retirement.

DELAYING SOCIAL SECURITY IS (USUALLY) WORTH THE WAIT

Since we know that long life is probable, we must account for this when making decisions regarding Social Security. As many of you know, we often—though not always—recommend delaying Social Security until age 70 for the higher-earning spouse. While there is some nuance here as to when each spouse might claim that is unique to each family, you can see below that the value of delaying Social Security can be significant. But the difference in real dollars is often much more than the 50%+ this graphic implies, as I’ll show you in the chart that follows this one.

SOCIAL SECURITY BENEFIT ESTIMATES AND “BREAKEVEN POINTS”

Social Security benefit payments for a high-income-earner would be $2,557 at age 62 versus $4,530 at age 70! That’s a big difference, right?! While these specific payouts represent the gross monthly benefit for a high earner, the percentage difference in payouts from age 62 to 70 would be similar across all income levels. This significant payout difference is why the “breakeven point”—the age at which total benefits paid to someone who claims benefits at age 70 would equal total benefits paid if they had claimed at age 62 or full retirement age—is lower than most people think at just 81 years old. If you also consider that the higher earner’s benefit continues for the recipient and/or their spouse’s lifetime (with a joint life expectancy age well into their 90s), delaying benefits is usually a smart decision for those who can afford to do so.

THE MORE YOU SPEND, THE MORE DEPENDENT YOU ARE ON YOUR PORTFOLIO

This seems pretty obvious as few people expect Social Security to cover most of their expenses at higher income levels, but the numbers may surprise you. For instance, for a family earning $150,000 per year pre-retirement wanting to maintain this standard of living in retirement, Social Security would provide just 33% of that need versus 44% at the $100,000 income level. In other words, the more income that is required in retirement, the more dependent that retiree will be on their portfolio which can, at times, be a worrisome experience. To state the obvious, being purposefully deliberate about spending in retirement can often help to reduce this reliance and worry.

HOW SPENDING CHANGES THROUGHOUT RETIREMENT

There’s a popular phrase often used to illustrate three distinct spending phases in retirement. That is your “go-go years, slow-go years, and no-go years.” This catchphrase is quite accurate when considering the data except for potential end-of-life healthcare and housing costs that often increase as we age. The good news is that this general decline in spending can often allow for slightly higher withdrawal rates early in retirement to pay for more travel and other discretionary expenses.

THE VALUE OF BEING FLEXIBLE WITH SPENDING IN RETIREMENT

In an ideal world, every retiree would have a perpetually rising retirement income, but the markets may not always cooperate such as during extended bear markets. However, not all hope is lost in these environments as the data shows that the willingness to adjust withdrawal needs during tough markets in minor ways can extend the portfolio’s life by more than a decade in some situations. As those of you who work with us on your retirement income plan know, this dynamic “guardrails” approach of maximizing lifetime income while minimizing lifetime taxes is a key part of our retirement planning.

NOT TRYING TO TIME THE MARKET WITH YOUR RETIREMENT PORTFOLIO

We know by now that markets are unpredictable in the short-term and evidence shows that forecasters and stock picker’s ability to outperform indices is dismal.  However, that doesn’t preclude us from getting nervous with our retirement investments and even trying to take “control” during down times by selling parts of your portfolio “until things settle”. 

This attempt to “time the market” actually leads to missing out and underperforming: 

IMPORTANCE OF TAX DIVERSIFICATION AND PROACTIVE TAX PLANNING 

Just like having “all your eggs in one basket” in one investment basket (i.e. concentrated stock, one asset class, one’s business, etc.) is risky, having all your eggs in one type of account (i.e. tax-deferred retirement savings such as an IRA) can create risk and problems later on in retirement.  This creates opportunities for “Tax Diversification”.  Tax diversification can take on various forms, but finding ways to increase tax-free buckets such as Roth 401(k)s, Roth IRAs, Health Savings Accounts (HSAs) can diversify your assets ahead of retirement in case taxes do go up throughout retirement.  Another often-overlooked opportunity is proactively taking advantage of the “tax planning years” shown in the chart where work ends and before Social Security, pensions, and required minimum distributions (RMDs) begin.

UNDERPREPARING FOR HEALTH CARE COSTS

Often pre-retirees and retirees under-prepare for health care expenses in retirement. This is true is properly planning from early-retirement until Medicare eligibility at age 65 along with not properly preparing for rising expenses and out-of-pocket expenses when on Medicare. As clients know, we inflate health care expenses at a significantly higher inflation rate than other expenses so that your portfolio and retirement income can adequately cover this growing need throughout retirement.

THE PROBABILITY OF NEEDING LONG TERM CARE

While somewhat uncomfortable to discuss, it’s not surprising that the probability of needing long term care rises with age with almost 50% of people age 90 or older requiring some assistance. Unfortunately, this data ignores the joint probability of at least one spouse in a couple requiring care.

According to Healthview Services—for the healthiest older adults—it is estimated that there is a 75% probability that one partner will require some level of care which is why planning for this type of event is so important.

ALIGNING YOUR INVESTMENTS WITH YOUR GOAL’S TIME HORIZON

As you already know, I believe that short-term assets should be used for short-term goals (and near-term income needs) and long-term assets for long-term goals, which is pretty self-explanatory.

However, I want to focus on the bottom part of this chart. We’ve mentioned before that life expectancy after retirement can be 30+ years and that we should plan accordingly. With this time frame in mind, it’s helpful to see that negative returns in equities are a historically short-term phenomenon as both the best and worst annual returns over long time periods have comfortably outpaced inflation.

More specifically, over rolling 20-year periods since 1950, the average annual return ranged between 6% (at worst) and 17% (at best) which speaks to the long-term value of equities being well worth the wait.

I understand that it’s natural to be concerned about short-term market trends, but we should remember that retirement is a marathon, not a sprint.

CRAFTING TIME WELL SPENT IN RETIREMENT

Having spent the last two decades helping successful individuals prepare for retirement financially, a common under-prepared aspect is how to best maximize time in retirement in a healthy and fulfilling manner.

Work forces structure on us for decades and can become a large part of our identity. Whereas retirement is a blank slate, which forces retirees to create daily structure and can often be a time of redefining oneself.

This freedom is what makes it so exciting and yet also concerning if one’s time is not intentionally structured in a manner to live a healthy and fulfilling next chapter. The “PUSHES” structure shown here is one of many resources to help craft time well spent in living a successful retirement.

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