Most colleges offer capstone seminars and at least considerable support on finding a job. It’s a shame those don’t include considerable discussion of retirement planning, because early money grows the most and postponing retirement saving to age 40 usually has quite burdensome consequences.
Student loans are an issue but from the first paycheck onward, everyone should be focused on getting out of debt — save a home mortgage — and participating in company retirement plans as soon as possible.
Housing remains a good long-term investment but people often mistakenly buy more home than they need. To supplement a paid-off house in retirement and Social Security, a nice investment portfolio is needed too, as defined-benefits pensions become increasingly scarce outside of government service.
Most folks don’t have access to private-equity deals or exotic real estate plays, and a diversified portfolio of stocks has proven best for the long haul. Over the last 50 years, the S&P 500 has outperformed 10-year Treasuries TMUBMUSD10Y, +0.55% by 2 to 1.
Recent market turbulence has created a lot of anxiety but the steady gains from the election of Donald Trump through late January were exceptional — big swings are the norm even in a growing economy and long bull market.
Those within 10 years of retirement should gradually adjust their portfolio from mostly stocks to half fixed income — the exact mix at retirement depends on factors, for example like money that may be needed for a child’s wedding.
Most folks often underestimate what they will need in retirement. Mortgages may be paid and children grown, but we tend to spend more on ourselves. For one thing, annual health-care expenses can range up to $24,000 per couple, or even more, because Medicare premiums are scaled to income and many older folks elect some kind of concierge service like MDVIP.
Most folks underestimate nonmedical expenses because regular avocations cultivated during working lives — assuming their kids gave them some time away from soccer, dance lessons, college admissions and the crises adolescent children create — don’t take up nearly all the leisure time available in retirement.
Folks don’t garden or golf much in the winter and even the most avid reader or knitter wants to get out the house more. Hence, retired folks often spend more on travel and entertainment and many take up an additional hobby — I started biking at 65 and was shocked at how much it cost to keep my carbon-fiber speedster on the road logging 7,000 miles a year.
Even well-established millennials sometimes need help from parents to get through rough patches or purchase a home — don’t judge them harshly, many baby boomers borrowed a down payment from their parents. Provisions are needed for the final decade of life when long-term care is often required, and one-time needs like a new furnace, roof or car still can cost more and come up sooner than anticipated.
After auditing all that, estimating annual needs and subtracting Social Security benefits from the total, it is important to recognize we are living a lot longer these days. Couples who reach 65 in reasonably good health, embrace activities that keep minds active, and exercise regularly should plan on one partner living to 100 to be safe.
The minimum annual distribution requirements for tax-sheltered retirement accounts imposed by the IRS at age 70 essentially assume longevity in that range. Simple prudence requires planning for retirement assets to last at least 35 years.
At retirement, if funds are allocated one-half in an S&P 500 index SPX, +0.15% fund and one-half in fixed income — for example a ladder of CDs ranging from one to five or seven years, retirees can conservatively assume a 4% annual rate of return. Assuming overall inflation at 2.7% — 2.25% general living expenses and 4.25% for health care — and running down savings at a rate of 3.5%, the money should last 35 years.
As a 4% rate of return is conservative, the money should last longer and some likely will be left for heirs.
If your savings won’t support your anticipated spending at a 3.5% draw down rate, then you should plan to work longer or continue earning some money after leaving full-time employment.
In any case, many folks find complete retirement boring and even stressful.