Has an employee ever asked you, “How do I know if I’m saving enough for retirement?”
There are no easy answers for this one, especially since:
- You don’t know what percentage of income the person’s putting aside each year, or
- How long he or she intends to keep working (and if that estimate is realistic based on personal health and the kind of work they do).
For someone who asks, “How much money will I need in retirement?” the only honest way to answer is with, “It depends.”
What’s most helpful is steering the person’s thinking in another direction so they can take honest stock of their finances before it’s too late.
Try asking these two questions of folks who are worried about their future:
1. How long will you need your retirement savings?
Fisher Investments tells their clients, “Don’t be surprised if you have a lot more years ahead than you think.”
People may know that the average lifespan for men and women has dramatically increased over the last 75 years.
But a 45-year-old typically can’t imagine him or herself at 80. We all make financial decisions on how we perceive reality, not on what the bare facts are.
Based on recent National Vital Statistics, here’s how long Americans in specific age brackets should expect to live until:
- Current Age 51: Life expectancy is 81
- 52 through 57: 82
- 58 through 62: 83
- 63 through 66: 84
- 67 through 69: 85
- 70 through 73: 86
Make it clear these numbers are averages, and not set in stone. They should be used as a benchmark to gauge if expected 401(k) and IRA withdrawls, stock dividends and the like will go as far as needed.
2. When do you plan on retiring?
Social Security (SS) is a help for just about any retiree. For some folks, it’s a critical lifeline if investments haven’t panned out or they’ve had financial difficulties along the way.
For example, AARP estimates that for 46% of unmarried SS recipients, SS makes up 90% of their total household income. That’s not a postition anyone wants to be in.
For now, you get the best bang for the buck by holding off retirement until age 66. Although that age can and likely will go higher with Congress running up massive debts and SS eventually going broke.
Another thing to keep in mind when counting on SS benefits. As recently as the 1990s, retirees could count on annual Cost of Living Allowance (COLAs) of 2.5% or higher, based on inflation.
Those days are probably gone. In 2010 and 2011, the SS COLA was zilch. The following year made up for it with a 3.6% boost. But in 2013 and 2014, COLAs for SS were 1.7% and 1.5% respectively.
Bottom line: Putting off retirement just a few years will help increase the total worth of the person’s nest egg and maximize SS payments to boot.