Four Questions to Test Your Retirement Planning Assumptions
It seems many Americans are over-confident
Are you among the nearly three out of four American workers and retirees who recently told the nonpartisan Employee Benefit Research Institute, in a survey, that you’re confident in your financial situation for retirement?
Separate research by Fidelity suggests a good deal of that confidence is misplaced. Here are four of the questions Fidelity posed in its own survey that proved the most vexing:
Q: How much should you save for retirement?
Fidelity and others in the retirement saving biz have run the numbers and based on all sorts of logical assumptions, the suggestion is that by the time you retire you should have at least 10x your final year’s salary saved up. Just 25% of folks chose that much. Half of participants chose 5x or less.
Fidelity offers a decade-by-decade cheat sheet of sorts to make this all a bit more manageable. The advice is to have 1x your salary saved in retirement accounts by the time you hit 30. At 40 you want 3x, at 50 6x, at 60 the goal is to have retirement savings equal to 8x your salary. And by age 67 — the latest possible age to qualify for 100% of your Social Security benefits — the recommendation is to land at 10x.
Q: How much of your retirement accounts can you withdraw each year?
There are a lot of variables to consider here, with your longevity being the biggest wildcard. But the standard advice is that if you keep your withdrawals between 4% to up to 6% a year, you won’t likely run out of money. Yet nearly 30% of participants thought withdrawing 10% to 15% would work.
That’s actually going to be pretty dangerous. If you’re smartly setting your planning horizon to still being around at age 90 (age 95 is even a safer assumption), you need to pace your annual withdrawals to extend the life of your portfolio. A 10% or higher withdrawal rate is likely not going to last as long as you. This is where hiring a financial planner to help you work through a variety of scenarios and assumptions can be very helpful
Q: How much will you spend in retirement on out-of-pocket retirement costs?
Fidelity has long produced an annual estimate. The most recent is that for a 65-year-old couple, lifetime retirement healthcare costs might reach $300,000 or so. Yet most participants said they thought it would be less than $100,000.
Clearly, underestimating the significant cost of healthcare is important. But so too is perspective. The big honking sum is for what is presumed to be a Very. Long. Retirement. You don’t need $250,000 or $300,000 at retirement. That’s the potential total over 25 or so years. When it comes to retirement healthcare costs, don’t lump yourself into a panic.
Q: What’s your full retirement age for claiming 100% of your Social Security benefit?
You are allowed to start your Social Security benefit as early as age 62. But when you start before you reach your full retirement age (FRA), you lock in a permanent reduction in your benefit. Less than one in five survey participants knew their correct FRA. For anyone born between 1954 and 1960, it’s somewhere between 66 and 67. Everyone born in 1960 and beyond has an FRA of 67.
Even more important is understanding how waiting until age 70 to start Social Security is the biggest win. Social Security will pay you more for waiting a few more years past your FRA. Someone with an FRA of 67 will be credited with an 8% guaranteed increase in their Social Security benefit for each year they delay after reaching their FRA. That’s a 24% guaranteed boost in your benefit starting at age 70. There is no investment right now that comes anywhere near delivering a risk-free 24% return over three years. You can’t even earn 2% a year in cash.