January 10, 2019
If you’re decades away from retirement, you may not think it’s necessary to start saving yet as your money can be better spent elsewhere. As a rule of thumb, many experts agree that you will need about 70% of what you make at the peak of your career to maintain that standard of living in retirement. However, you will also need to anticipate and develop a financial plan for major life events—expected or unexpected—which may include medical needs, long-term care and changing family dynamics. When you factor in inflation, these numbers can increase quickly.
Unfortunately, several changes in the way Americans have historically made it through retirement make saving early and often more important than ever. As you think about your financial future, the following considerations may convince you to move retirement planning to the top of your priority list.
Although the collapse of Social Security has been a looming threat for some time, funding issues have become a more imminent concern in recent years. According to the Social Security Administration, Social Security programs are currently facing issues of long-term insolvency. Without new legislation to reform Social Security as we know it today, the program is expected to experience significant challenges in the next two decades and may be met with decreased benefits, increased taxes or borrowing from other areas of the government.
Due to several factors, primarily changing demographics in the U.S., the Social Security Trust Fund—the surplus of tax dollars collections over benefits paid out—projects that it will be depleted by 2034 without meaningful entitlement reform. While the program is not expected to not disappear completely, future Social Security benefits are expected to be reduced to approximately three-quarters of what retirees have been promised when the Social Security Trust Fund reserves are eventually depleted. In other words, a retiree who expects to receive $2,500 each month in Social Security benefits would only collect $1,925. No matter when you retire, supplementing your Social Security benefits with other sources of retirement income will likely be critical.
Many factors are making retirement seem more challenging than ever before, one of which is that traditional pension plans have all but disappeared. According to Boston College’s Center for Retirement Research, at one time, 88% of private sector workers who had a workplace retirement plan had a pension. That number is now closer to 33%. Of the remaining pension plans, many struggle with inadequate funding.
The onus of saving for retirement has shifted from employer to employee in recent decades, as many employers have chosen to reduce their liabilities by offering defined contribution retirement plans instead of defined benefit plans (pensions). However, if you choose to utilize your retirement benefits wisely, they can still be effective savings tools. While 401(k)s and other employer-sponsored retirement plans can be subject to market and investment risks, the earlier you start contributing, the more likely you are to benefit from the power of positive compounding. For example, assuming a 6 percent annualized rate of return over a 40-year period, contributing $5,000 annually results in savings of $820,238 when you retire.
As life expectancies increase, many retirees face the possibility of outliving their assets. According to the CDC’s National Center for Health Statistics, the average life expectancy for Americans born in 2018 is 78.7 years, meaning the length of time you spend in retirement can be significant.
One of the most significant effects of living longer in terms of your retirement savings needs is that you will likely have to pay more in healthcare during your lifetime. According to the 2017 Retirement Health Care Costs Data Report released by HealthView Services, retiree healthcare expenses are expected to rise at an average annual rate of 5.5% for the foreseeable future—almost triple the U.S. inflation rate from 2012-2016—and a 55-year-old couple retiring in ten years will need up to 92% of their Social Security benefits to cover healthcare costs in retirement!
There are many reasons to start saving for retirement sooner rather than later. Fortunately, if you feel you’ve fallen behind on your savings, it’s not too late. Work with your financial advisor or a trusted financial professional to help you set new savings targets and get back on track towards your goals. Achieving a comfortable retirement isn’t out of reach with proper preparation and planning.
Cathy Schnaubelt is a senior wealth strategist for CIBC Private Wealth Management's Houston office, with more than 35 years of industry experience. In this role, Cathy is responsible for the development of integrated wealth management solutions and provides comprehensive estate and financial planning services to high net worth clients.
This article originally appeared on Forbes.com on Nov. 1, 2018.
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