To Retire, Pick One of Three Bad Options


Do you want the good news or the bad news first?

The sun is shining and it’s supposed to be a spectacular March day, so let’s go with the good news first. Here it is: We’re living longer these days. Hooray!

Indeed, according to the Centers for Disease Control and Prevention, the average female born in 1950 could expect to live to the age of 71 and the average male to age 65. Fast forward to 2014 and the average female baby born could expect to live to 79 years old and the average male to 76 years old.

But that’s not all. There are some researchers who believe innovations in disease detection and prevention could, in the not-too-distant future, meaningfully increase those average life expectancies.

What, then, could possibly be the bad news?

Well, if we continue to save as the experts have recommended (around 10%), retire at the normal age (between 62 and 65), and spend the suggested amount from our portfolio each year (approximately 4%), the vast majority of us face the unsavory prospect of running our savings dry, leaving only Social Security to fund our lifestyles in the later stages of retirement.

Depending on your situation, that scenario could result in a substantial spending shock, not to mention forced alterations to future plans for charitable giving or inheritance. There’s the bad news.

So how can we avoid this fate? It comes down to three options. Choosing which one suits you best may feel like trying to decide which form of torture you like the most. But to ensure we don’t run out of money before we run out of time, unfortunately, we will have to choose at least one of the following options.

  1. Work longer

  2. Save more

  3. Spend less

Does it feel like the bad news just got worse?

To be fair, we could also count on earning higher returns on our portfolio. In that case, the market could bail us out of our living-longer conundrum. You shouldn’t count on it.

The market doesn’t care if you need an 8% return, or a 12% return, or a 15% return to retire comfortably. Over long periods of time, the U.S. stock market has increased by 9-10% annually. It’s not likely to outstrip that rate in the future. That means higher returns probably aren’t an opportunity, assuming your portfolio is already sensibly invested.

On the upside, if scientists can prevent and/or treat diseases that would have otherwise forced us out of the workforce, perhaps working longer won’t be a problem. We may not want to retire. And if we work longer and continue contributing to a company retirement plan, we will save more by default. As a result, we shouldn’t have to worry about spending less in retirement. It’s a triple play!

Living longer is a double-edged sword. We can’t truly reap the benefits of longer life without properly preparing for the impact it may have on our retirement.

The key is preparing and making the necessary changes today. Don’t wait until it’s too late. The prospect of running out of money before you run out of time is clearly not appealing.

For many of us, we still have options to avoid that fate. The question is: Which option is right for you?


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