Here Are 3 Questions (and answers) About Your Retirement

Bingo! This is the key question to retirement. Laura Carstensen, Ph.D., director of Stanford University’s Center on Longevity says, "You could plan your money really well if you knew exactly when you were going to die. Unfortunately, it doesn’t work that way. None of us has a guarantee."

 

But you can buy another kind of guarantee, an assurance that, however long you live your money will not run out. It’s sold by life insurance companies, and it’s called an ‘immediate annuity’. Annuities have gotten a bad name, largely because of the abusive sales of "deferred" annuities, a kind of fee-heavy investment. But ‘immediate annuities’ are different.

 

It used to be that any college freshman who hadn’t dozed through Economics 101 could tell you what investments will earn in the long run. Drawing on 85 years of market data compiled by the Chicago research firm Ibbotson Associates, everyone assumed U.S. stocks would earn about 10 percent a year on average; bonds, around 5.5 percent; and a half-stock and half-bond portfolio, around 8 percent.

 

Suppose you had saved $500,000 by age 60. If all went well, you’d have a bit more than $1 million in the bank by age 70. At today’s annuity rates, that would buy you an annual income of $87,000 for the rest of your life. Not bad. But if you’d had the misfortune of turning 60 in 2000, the dawn of the ‘lost decade’, you’d have reached retirement 10 years later with barely the same $500,000 you started with. Your annual annuity income from that sum today: just $39,000.

 

You can build in a margin of safety by plugging very low returns into your retirement calculators.

 

Now you’re ready to adjust your plan based on shifting market realities. But what, exactly, are you supposed to adjust? It’s not as though you can decide to live longer or choose what your investments will return. There is, however, one big question over which you do have some power, says Alicia Munnell, Ph.D., director of the Boston College Center for Retirement Research: how much income you will need to be comfortable.

 

Save. Regularly. The benefit of saving more each month is obvious. If markets perform well, a dollar saved today could grow to two dollars or five dollars at retirement. Even if the markets produce one lost decade after another between now and your retirement, a dollar saved is still a dollar you wouldn’t otherwise have in the future. That’s why planners who once advised saving 10 percent of your salary now recommend 15 percent. It’s all about the margin of safety.

 

Maybe you shouldn’t retire after all. Good health and employer willing, you can also choose when to retire. "Retiring later is a very powerful lever," says Munnell. "It completely changes the arithmetic."

 

It raises your monthly Social Security benefits.

It allows your retirement savings to accumulate for more years, possibly helping you regain lost ground.

It shaves the number of years you’ll need to live off your savings. Remember, just because you work longer doesn’t guarantee you’ll live longer.

Finally, you can choose to live on less income than you may have initially aimed for.