Wednesday, July 12, 2017

Are We There Yet?

It is no secret that returns in the capital markets (stocks and bonds) have been volatile (and below historical averages) for the past few years. Some market “experts” are predicting that those lower returns will be the “new normal” for some years to come. If that prediction is correct, individuals must save more to maintain their desired standard of living in retirement.

We are presenting below a “savings checkpoint” table for determining whether your current savings amount is “on schedule” to fund retirement at your current standard of living. The table is a function of current age and income level. This table is based on J.P. Morgan Asset Management’s proprietary model with their capital market assumptions and an 80% confidence level.1  Several additional assumptions are involved:
  • The assumed annual gross savings rate going forward is 10% (about twice the current US average savings rate).
  • Pre-retirement investments earn 6.0% per year.
  • Post-retirement investments earn 5.0% per year.
  • Inflation is 2.25% per year.
  • Retirement age is 65 for the primary wage earner; age 62 for the spouse.
  • Retirement will last 30 years.
You can use the factors in the table below to determine if your accumulated savings is sufficient:

Age
$50,000
$75,000
$100,000
$150,000
$200,000
$250,000
$300,000
30
-
0.5
0.8
1.3
1.8
2.1
2.2
35
0.3
1.2
1.5
2.1
2.6
3.0
3.2
40
0.8
1.9
2.3
3.1
3.7
4.1
4.3
45
1.5
2.8
3.3
4.2
4.9
5.4
5.7
50
2.4
3.9
4.5
5.6
6.4
7.0
7.3
55
3.4
5.2
5.9
7.2
8.2
9.0
9.3
60
4.5
6.8
7.5
9.1
10.4
11.2
11.7

The income levels across the top are gross income (before taxes and savings). Go to the intersection of age and income level to determine the appropriate factor. For example, a 40 year old person earning $100,000 per year has a factor of 2.3. Multiply your current salary times that factor to determine the amount you should have saved today or $230,000 in this case (2.3 x $100,000). Savings are assumed to continue at 10% per year until retirement.

Are we there yet? Please visit us at Paragon Financial Advisors to determine whether your savings level is sufficient to provide the retirement lifestyle you desire. We can help you plan for your future financial goals. Paragon Financial Advisors is a fee only registered investment advisory company located in College Station, TX.  We offer financial planning and investment management services to our clients.

 

1The J.P. Morgan model uses household income replacement rates from an inflation-adjusted analysis of Consumer Expenditure Survey (BLS) data (2011-2014). Social Security benefits are assumed using modified scaled earnings in 2017 for a single wage earner at age 65 and a spousal benefit at age 62 reduced by Medicare Part B premiums.


Thursday, July 6, 2017

Factors in Retirement-Longevity and Working Career

In previous postings, we discussed some of the factors facing prospective/current retirees. These factors were classified in three general categories: 1) factors over which we have total control, 2) factors over which we have some control, and 3) factors over which we have no control. The second category (factors over which we have some control) included:

  1. Longevity, and
  2. Employment earnings and duration.
The second category is the subject of today’s posting.
 
Longevity
 
Genetic factors play a significant role in how long we live; so do life style choices. While individual life spans are difficult to predict, actuarial data allow us to view life spans in aggregate. First, women live longer than men and life span has been increasing.
 
Average Life Expectancy at Age 651


Year
Women
Men
Difference
1990
84.1
80.1
4.0
2015
85.5
83.1
2.4

Second, if you are 65 today, then:

Probability of Living at Least to (or Beyond) a Specific Age2


Age
Women
Men
Couple (1 alive)
75
85%
73%
97%
80
73
63
90
85
55
43
74
90
33
22
48
95
13
7
20
100
3
1
4

These figures are mid-points, not an end-point. The bottom line: you may need to plan on living much longer in retirement (perhaps as long as your working career). Consequently, a portion of your investment portfolio should be structured for growth in order to maintain purchasing power over the retirement years.

Employment Duration

Income in retirement has been compared to a “three legged stool” composed of pensions, Social Security, and investment/savings. Now a fourth leg has been added (a chair??) with employment income in retirement. As the population ages, the percent of older people in the work force has been increasing. In 1994 there were 31 million people age 65+ in the civilian population; that number had risen to 45 million in 2014 and is projected to be 62 million in 2024.3  By age groups, the number working is even more interesting.

Percent of Individuals in the Civilian Labor Force3


Age
1994
2004
2014
2024 (Est.)
65-69
22%
28%
32%
36%
70-74
12
15
19
23
75-79
7
9
11
14

People work in retirement for various reasons:

Major Reasons People Work in Retirement4


Reason
Need
Desire
Buy extras
26%
-
Make ends meet
25
-
Keep insurance/benefits
23
-
Decreased value of savings/investments
21
-
Stay active/involved
-
56%
Enjoy working
-
54
Job opportunity
-
24
Try new career
-
8

Finally, the age at which one retires is not always the date of anticipated retirement. Sixty-seven percent of workers expected to retire at age 65 or older. Only 23% retired as planned; the actual median retirement age was 62.5 Reasons for earlier retirement included the following:

Reasons for Retiring Earlier Than Planned5


Reason
Percent
Health problems/disability
60
Employer changes (downsizing/closings)
27
Other work related items
22
Care for spouse/family member
22
Superannuated work skills
10
Ability to afford early retirement
31
Choose to do something else
17

The Bottom Line

The “law of large numbers” whereby we look at aggregate statistics can provide some information for use in financial planning. Those “large numbers” indicate that an individual may have a much longer time in retirement than anticipated, and there may be fewer working years to save for retirement. Individual circumstances vary of course; please see us at Paragon Financial Advisors to review your “retirement readiness.”  Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas.  We offer financial planning and investment management services to our clients. 

 

1 Social Security Administration 2016 OASDI Trustees Report

2 Social Security Administration Period Life Table 2013 (published 2016)

3 Bureau of Labor Statistics, Monthly Labor Review, December 2015

4 Employee Benefit Research Institute, Matthew Greenwald & Assoc. Inc. 2014 Retirement Confidence Survey

5 Employee Benefit Research Institute, Matthew Greenwald & Assoc. Inc., 2016 Retirement Confidence Survey
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