The most pressing question for many investors is a simple, yet difficult one: Will you run out of money before you die? Everything else really pales in comparison.
A recent report from the
World Economic Forum details the huge gap between available retirement resources and increasing life expectancies throughout the world. This retirement resources gap is growing larger each year with no end in sight.There are a couple of important insights that this report highlights. First, it’s no great surprise that in the U.S., individual retirement savings rates are simply not high enough to sustain the withdrawals needed for lifestyle expenses until death. However, a look at other countries where savings rates are higher, such as Japan, reveal yet another problem. In Japan, most investors avoid “risky assets” (such as stocks) and therefore even significant savings rates won’t solve the retirement equation.The chart below from the World Economic Forum Analysis details the gap between average savings for retirement and life expectancy. According to the analysis, the average savings in the U.S. will last 9.7 years. The problem is, of course, life expectancy for men extends 8.3 years
beyond that and 10.9 years for women. Other countries fare even worse with the gap in Japan coming in at 15.1 years for men and 19.9 years for women.
A Toxic Brew for Retirees
In many ways, none of this is really news. The combination of poor savings rates and longer life expectancies has created a
toxic brew for investors with retirement on the horizon. There are solutions of course, but none of these solutions come without trade-offs. For some, postponing full retirement is a smart approach. If you work until age 70 instead of 65 this provides more time to save and also decreases your retirement withdrawal timeframe. This might also allow you to postpone the start of Social Security until age 70 with a much higher monthly benefit.For other investors,
increasing exposure to “risky assets” might be in order since higher expected returns may be needed to narrow the resources gap. As the research highlights, in the Japan example, it’s necessary to accept short-term risk in order to obtain above inflation, long-term returns. Portfolios without significant exposure to stocks aren’t conservative…they are deadly.
Reducing Living Expenses in Retirement
Of course, reducing retirement living expenses, while not desirable, is a necessity for many retirees. Because no one knows exactly how long they will live, you have to plan on living well past your standard life expectancy.Running out of money in retirement translates into a loss of freedom and dignity.
Do you have enough money to sustain your lifestyle including living cost increases until death? All the other financial, investment, and tax questions fold under the weight of this important objective. Start there.Related:
How Do You Plan to Pay for Inflation?
