Longevity: The Retirement Problem No One Is Discussing

My name is Brian Scribonia and on this episode of the Common Sense Financial Podcast, my approach to this problem is fairly simple. Avoid using the stock market as a means to draw income because you have zero control over the outcome, it's gambling, and basically trusting that the government and Wall street are going to do what is best for your portfolio. Of course I'm being sarcastic, but every day I see headlines that leave me scratching my head and wondering how this circus is going to.

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Opportunities are still there. The attempt at passing down wealth from generation to generation. Consider the outcome, not just popular opinion.

And the whole teaching there is about preparedness and being ready.

There's a difference between what's real and what's true. You're listening to the Common Sense Financial Podcast. I'm your host Brian Scribonian. Thanks for tuning in and let's get into today's topic. Retirement is a major financial milestone for many individuals. However, there's a significant blind spot that many people have when it comes to retirement planning, which is the potential for living longer in retirement than they actually worked. And in the past, we have seen people retire at age 65, live for another 1015 years. However, with the advancements in longevity science, people are living longer. And the idea of living 15 years or more in retirement, in my opinion, is a vast understatement. According to a 2019 study by the Centers for Disease Control, a 65 year old man today can expect to live on average until age 76, while a 65 year old woman can expect to live until around 81. However, these numbers are just averages and many people will live well into their 90s or even beyond. In fact, according to a 2016 Pew Research study, the number of people living to 100 years old is increasing rapidly. This increased life expectancy means that people will necessarily need to save more money for retirement, and the money they have will need to be preserved to help avoid running out of money. With people living longer than ever, I feel that it is entirely possible to be retired for as many years as you've worked. Just consider this. You begin working at age 20, work for 40 years until age 60, then retire, and then you live to age 100. That is 80 years of an increasing income need, with you quitting midway through to retire and then begin relying on your assets to sustain you. There are many variables that go into creating streams of income in retirement while protecting that source of income. It can be challenging, especially given the unpredictable and volatile nature of the stock market. According to a 2019 retirement confidence survey conducted by the Employee Benefit Research Institute, which is ebri, more than half of American households are at risk of running out of money in retirement due to a lack of savings and the unpredictability of the stock market. Therefore, it is important for retirees to plan and invest carefully to ensure that they have a reliable source of income throughout retirement years. Think about when you first started your career and how much money you were making. Then fast forward to today and compare the difference. Hopefully that number has increased, but looking back, you likely found that those increases weren't always a lifestyle enhancement, but rather just an inflation adjustment. To illustrate the point, an inflation rate of just 2% can seem like a small figure, but when you multiply this over 10 years, it translates to 20% or 20 cents on a dollar. In other words, a $50,000 salary today will require you to earn $60,000 in 10 years. So if you make $50,000 a day in 20 years you would need $72,000 of income to live the same lifestyle. And in 40 years you would need $108,000 to live the same lifestyle your 50,000 is providing today. So according to a study by the EBRI, only 42% Americans have tried to actually calculate how much money they will need to have for retirement. This is quite shocking considering what's at risk. I have mentioned this before on other shows, but I think it's worth sharing again. I find that most people have arbitrary figures for how much they want to have saved for retirement. I hear figures thrown around that are often nothing more than rounded off nice sounding numbers. The thought of having millions of dollars is energizing, but what really drives the decision to retire is most often Social Security eligibility, regardless of how much money is being saved. The concern I have with this is that many people I speak with are making decisions based on their present situation while relying too heavily on things they cannot control for future it's really a lot to assume considering so much of what impacts your money is out of your control. The big three are inflation, the markets and taxes. So to offset inflation of course you need to earn more on your money than the inflation rate that is eroding your purchasing power. And then to protect against market losses, you need to either not be in the market at all or work to insulate your portfolio by using very far reaching diversification strategies that ideally do not completely correlate with the stock market. And then to protect against taxes, you would concentrate on building tax free assets and stop the propensity to defer taxes for later on down the road. Now these may seem like common sense moves, but in my experience so many people are doing the opposite of these things. I see people funding their 401k accounts, which goes against what I'm outlining about taxes. I see people parking money in the bank not knowing what to do with it, which goes against trying to keep up with inflation. And I see people pouring money into the stock market, often chasing returns and maintaining a narrower approach to their asset allocation. So it's my belief that there should be a strategic plan put in place that addresses these areas and attempts to move things into the retiree's control instead of simply crossing fingers and hoping everything works out. Of course I do not have a crystal ball, but we have to recognize that when the market is going down, this could be seen as an opportunity to invest money into the market. But when you're retired and withdrawing income from your investments to cover lifestyle expenses, this is a problem. My approach to this problem is fairly simple. Avoid using the stock market as a means to draw income because you have zero control over the outcome, it's gambling and basically trusting that the government and Wall street are going to do what is best for your portfolio. Of course I'm being sarcastic, but every day I see headlines that leave me scratching my head and wondering how this circus is going to end. Now there is a time and a place for public market investing with the long term time horizon, but the entire meaning behind long term is not needing the money until a later date. I don't know about you, if you remember that infomercial in the 90s by Susan Powder, author of that book Stop the Insanity. I can still hear that catchphrase in my head as it played so often on TV. According to a 2018 article by some outfit called Mental Floss, powder made $50 million in 1993 telling people what they already knew. I mean, if you're not healthy. You can't keep doing what you're doing. Eat right, exercise more. Same thing we hear on a regular basis. We know it to be true. I bring this up because I think the same can be said about retirement planning, right? If you're at or in retirement needing income from your assets and feeling uneasy about how the market has performed over the last 20 years, you may want to stop doing what you're doing now. I realize that all my asset management friends reading this or listening to this or shaking their fists at me saying that the market will be fine, we just have to give it time. And I don't necessarily disagree. I believe that the markets are likely to recover, but my question is at what cost for those drawing income to live on? Yes, the market cycles up and down, so we have no reason to believe this time is any different. But according to a recent inquiry using ChatGPT, if you retire on January 1st of 2000 and began drawing $50,000 of income from a million dollar portfolio invested to match the S&P 500, you would have run out of money in 2008. Yes, the market has recovered since then after 2008. But discussing the market as a whole is not the same as someone who is retired taking income from their investments. What should be understood is that accumulating money is done one way and drawing income for retirement is done another way. They are not the same thing, otherwise there wouldn't be a need to differentiate the two. The bottom line for me is this retirement planning is not something to be taken lightly. Underestimating the amount of money needed to maintain a comfortable lifestyle in retirement or relying on too many things outside of your control can be a significant financial risk. It's recommended, of course, to work with a financial advisor who specializes in distribution to find an optimal strategy for the potential of living longer than anticipated in retirement. With careful planning, retirees can focus on enjoying their golden years instead of dealing with a shortfall of income later in life. If you want to learn more about retirement strategies and what they can mean for your retirement, visit YourGapReport.com that concludes today's podcast. I'm Brian Scribonia. Thanks for listening to the Common Sense Financial Podcast. Thanks for listening to today's show. If you liked what you heard, be sure to subscribe on YouTube and Spotify so that you can receive notifications when we release new episodes. I'm Brian Scribonia and this is the Common Sense Financial Podcast.