Home Cartoon budget Retirement expenses are too difficult to predict

Retirement expenses are too difficult to predict

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(Bloomberg Opinion) – Most people don’t budget for real emergencies – which are, thankfully, rare – but for what we might call predictable surprises. For example, there is no emergency vehicle or home repair. All cars and homes will need repairs and maintenance, even if you don’t know when. For true automotive or household emergencies, there is insurance.

Saving for retirement in the United States is so difficult, in part because the surprises are so UNpredictable – not to mention unpleasant: inflation, outliving your money, going to a retirement home. And our insurance – social security – is inadequate. The impossible task of retirement planning reminds me of a New Yorker cartoon I cut out and saved for so long it turned yellow: A member of a couple looks up triumphantly from a kitchen table covered with papers and said, “If we retire late and die early, we’ll just miss it.”

Social Security should be a near-perfect way to handle retirement uncertainty: Social Security pays a benefit regardless of how long you live and is adjusted for inflation. But it’s too small to live on, so you have to have other sources of income.

Only a few Americans who are very wealthy or who live on traditional defined-benefit pensions don’t worry about running out of money. My mother, for example, lived on less than $25,000 a year. She was so preoccupied with money that she avoided visiting her friends. When she died suddenly at age 84, she had plenty left. Seeing all the money she saved for emergencies made me sad.

But of course, none of us know when his time will be up. Planning for retirement involves playing the guessing game about longevity. Compared to actuarial mortality tables, men tend to overestimate and women to underestimate their life expectancy. To more accurately predict the unknowable, you can look to US vital statistics: in 2019, a 65-year-old white woman could expect to live another 21 years; his black male counterpart still 17 years old. Life expectancy calculations by socioeconomic class are more complicated, but the Brookings Institution provides one of the best. According to them, women born in 1940 in the 10% highest household incomes who lived to age 50 were expected to live another 28.5 years. Women in the bottom 10% who lived to age 50 were expected to live only 22.2 years longer. The rich have more of everything, including lifespan.

All this uncertainty complicates retirement planning. Consider: Someone earning, on average, about $70,000 a year, at age 65, needs $750,000 to top up Social Security to maintain their standard of living for 25 years. Assuming a life expectancy of 85 years, not 90 years, the number is reduced to $650,000. That’s a big difference!

You can plan perfectly and still be surprised. I knew a couple, married for 40 years, who worked good professional jobs longer than necessary to make sure they had enough. Two months after leaving their cold northern town to spend their golden years in the sunny South West, the woman was diagnosed with terminal cancer. Prior to her diagnosis, longevity tables predicted that she would live another 20 years. Instead, she died three years later. They had followed the advice of experts to the end. Premature death was possible, but not likely or foreseeable.

What about saving for a retirement home? This is an area where most of us worry more than we should. Only about a third of Americans currently between the ages of 57 and 61 will spend money on nursing home care at any point in their lives — and for 43% of people, private or public insurance will pay for it all. Only 5% of us will finance long stays in nursing homes, costing $47,000 or more. (Commercial long-term care insurance is a bad bet for most people.)

Many people can save for life’s bad surprises because they are predictable. With retirement planning, the only predictable thing is that it will be expensive. For decades, personal finance experts have nagged and shamed Americans into saving more, but the average retirement account balance for people over 65 is just $225,000. About half of the people saved nothing at all. The vast majority of retirees do not have enough, regardless of their lifespan. We need universal retirement savings accounts, low-cost, inflation-indexed annuities, a strong social security system, and Medicare that pays for long-term care.

Due to the self-contained nature of retirement savings, too many people are outliving their savings or hoarding money they should be spending – and everyone is overly anxious. To plan properly in this system, you need to know unknowable things. The United States needs better systems to help people cope.

Note: Email me with a financial surprise you’re concerned about, and I’ll write some tips on how to plan for it.

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To contact the author of this story:
Teresa Ghilarducci at [email protected]