I’ve seen several articles recently about people living longer in this country, which means we will need a larger nest egg for retirement. David Harrison’s article in the Wall Street Journal provided some compelling statistics.
Harrison outlines a few of the 10 facts that a new Brookings Institution paper examines about retirement. One is that people are living longer. For example, the average American women who turns 65 in 2015 have more than a one in three chance of living until age 90, up from a one in four chance 50 years ago. This one-third who will reach 90 will need to financially support their life for another 25 years after age 65!
What does this mean for your financial planning? Many of these people are the last to have a defined benefit pensions program to draw upon. Their pensions plus Social Security will support them in retirement. However, employers have shifted over the last 30 years to 401(k) plans and other defined contribution plans, which means that retirement savings is the responsibility of individuals. These types of savings plans now constitute 58 percent of a person’s retirement income, up from 20 percent 40 years ago. Only 13 percent comes from traditional pensions plans.
There are numerous reports and studies showing that many haven’t saved enough to fund what may be a 25-year or more retirement. Too many people assume that if they contribute to their employer’s 401(k) match, that they will be fine. That is a dangerous and erroneous assumption. Others just hope it will play out okay. I’m not big on “hope” as a method to prepare for a lengthy retirement.
The best way to know if you are saving enough is to create a financial plan. I advise folks to work with a CFP® professional to understand their retirement spending needs, likely income, and how much to save for retirement. Then execute the plan. It’s great that we are living longer – so let’s make the most of it!