You may be surprised to learn that the two biggest threats to your retirement are underestimating your longevity and miscalculating expenses 30 years into the future. It’s easy to see that these risks go hand in hand. If you end up living longer than you’ve planned, you’re at risk of outliving your money. And, if you haven’t accurately estimated expenses over the next three decades, the chances you’ll outlive your money are even greater.
The Importance Of Longevity Literacy
Longevity literacy is having a comprehensive understanding of how your financial situation is impacted by an increased lifespan in retirement. Yet, even with the wealth of information available, according to the Stanford Center On Longevity, 2 in 3 pre-retiree men underestimate the life expectancy of the average 65-year-old man while half of pre-retiree women underestimate the life expectancy of an average 65-year-old woman. Add to this, researchers have found a correlation between “longevity literacy” and successfully planning a financially secure retirement.
“If it increases just three years by 2050, it’s estimated that the cost of aging will increase by 50%.”
Living Longer Costs More
As you plan for retirement, accurately estimating the rising cost of your living expenses is a major challenge. This includes the cost of medical care and the skyrocketing expense of custodial long-term care services that are not covered by FEHB or Medicare. In fact, the longer you live, the more likely you’ll need to pay out of pocket for non-medical care in a nursing home. Add to this, since 1970, the average life span has been gradually increasing. If it increases just three years by 2050, it’s estimated that the cost of aging will increase by 50%.
Accurately Estimating Inflation Over 30 Years
Even if the rate of inflation increases only 2% to 3% each year, it can considerably reduce the buying power of your retirement income. For example, let’s say you’re counting on $60,000 for your first year of retirement income. At a 2% inflation rate, 20 years from now it would be worth $40,378.28. And if inflation rises to 3%, your $60,000 retirement income would be worth only $33,220.55 in 20 years.
If your longevity results in a 30-year retirement, inflation eats up even more of your income. At a 2% inflation rate, 30 years from now your $60,000 yearly income would be worth only $33,124.25. At an inflation rate of 3%, your $60,000 retirement income would be worth $24,719.21 in 30 years.
Accurately estimating your longevity, future expenses and the rate of inflation shouldn’t be a do-it-yourself project. Connect with an FRC® trained advisor who can develop strategies to help mitigate the financial impact of a 30-plus year retirement.
Source: https://longevity.stanford.edu/underestimating-years-in-retirement/
