By Nate Gage
I’m not proud to admit it, but taking proper care of my teeth was not always high on my list of priorities. Over time, this inattention led to the predictable consequences, with cavities slowly developing and growing. Eventually, faced with the reality of the situation, I put aside my fear and denial and made an appointment. As much as I dreaded the actual procedure, I dreaded the conversation with my dentist even more. I knew she would ask uncomfortable questions like what led to the problems in the first place and why did I wait so long to have it corrected.
Although I knew the question was coming, the best response that I could muster was a pathetic “I didn’t come in sooner because I was afraid of what you would tell me.” Karma is a funny thing; now all these years later I find myself on the other side of that conversation. No, I didn’t go on to become a dentist, but found myself in the financial services industry, specializing in workplace retirement plans, including serving in an advising capacity. When speaking to groups, I always strive to spend a little bit of time focusing on the big picture, encouraging everyone to do the planning needed to be ready to retire when and how they want. I also offer to meet individually with anyone looking to take a closer look, taking advantage of a retirement income calculator that makes the process easy and presents the results in a very user-friendly format.
The number of participants who take me up on that offer is relatively small and, often, those who meet with me have been considering doing so for many years. When I ask why they didn’t come in sooner, that’s when I hear “I was afraid of what you would tell me.” Despite that initial fear, the process is always helpful and, no matter the result, knowing is always better than not knowing. One feature of the calculator that I find particularly user-friendly is how the results are presented. Considering actual spending data for households with similar incomes, the user is presented with a calculated retirement income need in today’s dollars.
With the goal set, the next step is to calculate and present a projected result. This step requires some data including all current retirement savings across any outside retirement accounts and projected pension benefits that the household will receive. In addition, users specify their desired retirement age and may either rely on an estimated Social Security benefit amount or enter their own custom amount. With the data in, the user sees a side-by-side comparison of the amount of monthly income needed and the amount that the user is anticipated to actually have. Seeing retirement in terms of monthly income takes projections out of the realm of theory and probabilities of success and transforms them into something relatable.
For most Americans, Social Security will provide a meaningful portion of their retirement income. For workers who are still many years away from the age at which they may collect, Social Security projections introduce some uncertainty. One possible outcome of the funding shortfall that the system will face when the Social Security trust fund runs out soon is a reduction in monthly benefits for future retirees. This uncertainty makes relying on projected benefit amounts (calculated based on how the program is currently structured) somewhat risky. To err on the side of caution, those collecting Social Security further down the road may wish to reduce their amount to 77% of current projections, in line with Social Security’s estimates if no adjustments are made to the system.
When using calculators to assist with retirement planning, there are a few other variables that warrant caution. There is a wide range in the investment returns that are built into the multitude of calculators out there, but it is best to be conservative to avoid falling short of projections. While some calculators will factor in double digit returns, the calculator that I use generally incorporates a 5-7% assumed return while working and an even lower rate of return for retirees. While actual returns may exceed that, it’s better to be pleasantly surprised by a rosier retirement outcome than the inverse.
Life expectancy is another variable to pay attention to. While many participants underestimate potential life expectancy, it is important to anticipate living well into your nineties unless you have concrete reasons to expect otherwise. The need for income is another variable to be cautious about adjusting. Although it is tempting to meet your goal by moving the goalposts, it is better to either rely on a well calculated average or to do the work of budgeting household expenses. As retirement draws near, creating a custom budget becomes more important, especially if you have circumstances that may lead to your household deviating significantly from the average. One other consideration is to build in some flexibility around retirement age. While 67 is a common age that people give when asked when they plan to retire, the average age that people actually retire is closer to 62. Sometimes the earlier retirement is voluntary, but other times it is caused by factors outside of the individual’s control, like health concerns for themselves or a family member, or layoffs. Planning for an earlier retirement will help to protect against this risk, even if you wind up working longer.
The most important step to take in the planning process is the first one – starting. Many studies have shown that the very act of planning increases the odds of success. Those with a plan are more likely than their peers to feel confident heading into retirement. Beyond just feeling better, planners also tend to do better in terms of saving along the way, making them more likely to reach their retirement income goals. So, when presented with an opportunity to take a closer look at your household’s retirement preparedness, take advantage. Work with an advisor to get an objective evaluation of the situation so that you can take the steps needed to reach your retirement income goals.