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

Navigating Retirement

Ahhh—the good ole’ days. We’ve heard that expression applied to many things. It used to apply to retirement. Work 35 to 40 years for the same company, get a gold watch at retirement, then collect a pension check from the company for the rest of your life. But things changed. Pension plans (defined benefit plans) were phased out in favor of 401k plans (defined contribution plans). This change essentially shifted risk for providing retirement benefits from the employer to the employee. In addition, employees began changing jobs/careers more frequently; the long-term employee with a single company became the exception rather than the rule. Retirement resources historically were a “three-legged stool”—the benefits came from 1) a pension from the employer, 2) personal savings, and 3) Social Security.

 

Today’s retirement picture is significantly different. Let’s look at today’s retirement factors but do it in a framework of “control.” There are some factors over which we have complete control, some factors over which we have partial control, and some factors over which we have no control. For example:

Complete Control

1. Saving- today’s worker has complete control over the amount he/she chooses to save and when that saving starts (the sooner the better!!).
2. Spending-spending choices directly affect the amount saved; again, a choice made by the individual. Less spending means invested funds last longer.
3. Asset allocation-with 401k plans, the plan participant chooses how the money is invested. A greater the allocation to stock means a greater possible gain (or loss).
4. Location-cost of living in retirement varies significantly by geographic location. Relocation may mean a reduced need for daily living expenses. Of course, there are social considerations (friends, family, etc.) that affect this choice.

Partial Control

1. Employment earnings during working years-choice of jobs, education, work location can affect career earnings significantly. Aptitudes and personal preferences play a role here.
2. Duration of working career-how long one chooses to work significantly affects life style standards in retirement. Working longer means greater contribution to savings and fewer years those savings must cover in retirement.
3. Life span-while everyone has a genetic makeup that affects life span, so does life style choices. Proper diet, exercise, etc. can affect both longevity and quality of life in retirement.

No Control

1. Investment returns-asset allocation is an individual choice relating desired goals with acceptable risk. However, the actual performance of investments in each of those asset categories (stocks, bonds, etc.) is something over which we have no control.
2. Governmental polices/regulations-tax policies (and rates) and government regulations have an impact in retirement. Individuals with significant holdings in qualified plans (IRAs, 401ks) have a significant partner in those plans—the Infernal Revenue Service (note: not a typo)!

We at Paragon Financial Advisors assist our clients in navigating the path to and through retirement. Possibilities and pitfalls abound; please call us to discuss your specific circumstances. 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. 



   

Road Map To Retirement

The 2016 elections have certainly brought about some changes in the political landscape. One thing hasn’t changed however—an ageing population that is moving toward retirement. Baby boomers began turning 65 in 2011 and their number is increasing by about 10,000 per day. In 2017, the leading edge of the boom will turn 70 (complete with required minimum distribution requirements from retirement accounts). Considering this trend, we are beginning a series of postings on navigating the road to (and through) retirement.

First, we’ll look at some of the possibilities facing individuals as they approach retirement. Will older Americans continue working? How long is “retirement”? What about Social Security? How should one plan for spending and inflation?

Then, we’ll look at some of the “pre-retirement” planning that should be done. How much should one save for retirement? Should it be done in company savings plans? IRAs (traditional or Roth)

Spending in retirement is a key factor. How much is “too much” for investment withdrawals? Tax management (for investment withdrawals, taxes paid (income-federal and state; and local (personal property, real property) are no minor consideration. Health care (and long term care) costs are also an item of uncertainty and concern.

Finally, how does one pay for retirement? The reduction in defined pension plans and replacement with 401k plans has put the investment risk on the retiree. Quality of retirement is, in large part, how successful one is in managing his/her financial resources. We will begin some discussions on these topics.

“Plan your work, then work your plan.” That is the basis of financial planning that we at Paragon Financial Advisors assist our clients in doing. Please call us to discuss your specific circumstances, and stand by for more discussions on navigating the retirement road. 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.