How to save for retirement: The long view

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Think about the relationships in your life that will last a long time: Your spouse or partner. Your siblings, parents, and kids. And your 401(k) provider. At least that’s how we see it. 

We’re committed to helping you on your journey towards financial independence and everything else that you dream for your retirement. At the same time, we realize it might be hard to envision. It’s hard to fathom something two years in the future, let alone something 10, 20, 30, or more. That’s fine. You’ll need to revisit your retirement plan regularly and make updates as your career advances, as your household grows, and if you get sick or injured, just to name a few. For now, let’s walk through the basics you’ll need to know in order to make a plan.

What is retirement? 

Retirement used to refer to the day when someone would leave their job - and the workforce - permanently. It used to be an on-off switch, but that’s no longer true. 

The definition of retirement is changing

Today, people are increasingly defining retirement in a different way. One that doesn’t involve your workforce status, whether you’re in or out. Instead, it’s about financial independence. 

In a recent nationwide study, small business employees* are more likely to say that the definition of retirement is “being financially independent to do what I want” vs. permanent withdrawal from the workforce.  

The new definition of retirement: Being financially independent

Source: A New Era of Retirement Savings: How SMB Employees Are Navigating Financial Wellness and Retirement. Human Interest, 2020.

*Small business employees are those who work at a company with ≤500 employees.

  • Defining retirement: National survey data show the #1 way that people define retirement is “being financially independent to do what I want.”

How long does retirement last? 

Retirement lasts one-quarter of your life - it could be 20 or even 30 years if you reach the average life expectancy of 79. Your retirement could be longer or shorter, depending on several factors, including your industry, your target retirement age, your health, and, of course, your finances. 

  • Average life expectancy: Today, people reaching retirement age can expect to live, on average, twenty more years, and women tend to live about two years longer than men. 

When do people retire? 

Maybe retiring around 62-64 sounds like what you have in mind for your future. Maybe it’s not. There’s a wide spread in what people do that nets out to the average. Some people may retire at age 50, for example, whereas others work into their 90s

  • Average retirement age: Today, the average retirement age is 64 for men and 62 for women - close to where it’s been for years. The IRS treats “full retirement age” as 67 for people born after 1960.

How much does retirement cost? 

In addition to how long it lasts, how much you’ll need for retirement will depend on your lifestyle and other expenses. You’ll need money to do what you want to do, and what you need to do (e.g. do you need to save for health expenses or are those covered by Medicare?). 

To get a sense of how much you might need, let’s look at what many of today’s retirees are doing. Data from the Bureau of Labor Statistics shows that the average household headed by someone of retirement age (65-74) spends roughly $51,434 per year (in 2020 dollars), that would be $514,340 if your retirement lasts just that one decade. 

Here’s a breakdown of what that looks like (see line items on the right). You’ll notice that many people still have Salary earnings, listed on the left, even though they’re retirement age.

Average household spending: age 65-74

The good news is that, on average, household expenditures decrease by age 75. Still, they run $40,211 per year for today’s 75+ year olds. 

  • Average annual household expenditures in early retirement: $51,434

What else do I need to know to be able to make a retirement plan?

Here are some suggestions to help you create your plan...

1. Longer lives means longer retirements

You’ll need to plan for the long haul. When Social Security was introduced in the 1930s, the average American could expect to live to roughly 50 years of age (you’ll notice that’s later than the age of eligibility for Social Security). Today, the average American is living almost thirty years longer - to age 79 - now as a result of advances in medicine, public health, and sanitation. One risk you’ll be hedging against is outliving your money -- in fact, that’s the #1 concern for roughly half of Americans.

Key points to consider about longer life when making your retirement plan: 

  • Add it up. The average household headed by someone 65 years of age or older spends roughly $50,600 per year. If you multiply that up by 20 years, you’re looking at more than $1 million. There’s likely a wide range here, depending on lifestyle, where you live, and, especially, health.

  • Women’s longevity advantage. Women tend to live longer than men, yet retire earlier. Make sure that any retirement plans consider a few extra years of costs, especially for long-term care, unless there’s a family member who can help with caregiving. 

  • Work long and prosper. More people today include paid work in retirement, e.g. by delaying retirement or working part-time. An advantage: wages tend to keep pace with inflation. Another is that earning longer, even if part-time, could help prevent you from tapping into retirement savings (which means an even longer window to build up potential earnings).

2. Social Security won’t cover all you need

Many people have the misconception that Social Security is supposed to cover all their costs through retirement - it wasn’t designed to do that and if you’re planning on it, it’s time for a new plan.

Social Security was designed for a specific purpose: to guard against poverty in old age. It was not designed to cover everything you’ll need throughout retirement. In fact, Social Security only replaces about 40% of previous earnings

"We can never insure one hundred percent of the population against one hundred percent of the hazards and vicissitudes of life, but we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age."

-President Roosevelt upon signing the Social Security Act

Social Security FAQ

Key points to know about Social Security when you’re making your retirement plan: 

  • When can you start getting Social Security? Age 62 - but you don’t necessarily want to start right away. Keep reading for more… 

  • How much does Social Security pay? The average Social Security retirement benefit in June 2020 was $1,514 a month, or about $18,170 a year.

  • How is Social Security calculated? The Social Security Administration uses your 35 highest-earning years to calculate the average annual income, and then assign you a monthly benefit based on that. If you take a year out of the workforce, that could affect the size of your monthly benefit. 

  • How can you get the most out of your Social Security benefit? There’s good news. By deferring the start date for taking Social Security, you can qualify for a boost to your monthly payment. For every year you defer past what’s called Full Retirement Age, determined by the Social Security Administration, up to age 70, your monthly benefit will get an 8% lift. 

3. Understand Medicare to plan for health costs in retirement

Key points to know about Medicare when you’re making your retirement plan: 

  • When do you become eligible for Medicare? Starts at age 65, unless you have a disability or a serious disease, such as kidney disease or ALS. (Note: You may be able to delay the start date if you’re still working.)  

  • What is not covered? Medicare is a program with many “Parts,” each related to specific types of healthcare needs. For example, Part D relates to prescription drugs. Parts A and B cover in-patient and out-patient medical care, respectively. 

  • Medicare is free, right? No, Medicare comes with a cost. Some people think that, once they reach the eligibility age of 65, that all of their medical-related costs will be covered. That’s not true. There are co-pays and expenses that come with certain types of costs, such as many prescription drugs, vision, and dental. But, more importantly, long-term care, which is often one of the most expensive needs in retirement, is largely not covered by Medicare. To cover this gap, many people look to supplemental plans or long-term care insurance.

Now what? How to start your retirement plan...

Now that we’ve laid out some of the big picture basics on retirement, we’ll need to turn this into action. You’ll need to take stock using these three key questions: 

1. Think about: What are you saving for? 

Estimating the dollar amount you might need in retirement will depend a lot on your lifestyle. Do you anticipate traveling? A lot? Do you want to move? To lay low and relax? Do you want to start a business, to renovate a house, or pass money on to others?

People have many different ambitions for what they want their retirement to include, and starting to think about some of the bigger-ticket projects or adventures you might want will help make sure those get baked into your financial plans. Identifying what you’re saving for can help make it more real - and actionable.

2. List out the pieces of your retirement puzzle. 

Once you have a better idea about what you’re saving for, list out: 

  • Where you’ll get money from in retirement: This might include savings you already have, that you’ll set aside a portion of your income today, income you have from investments or work in retirement, Social Security, a pension, etc. 

  • Tools you can use to help you save: There’s a wide variety of ways you can save for retirement. Honing in on some of the key retirement savings tools will be the focus of the next guide.

3. Identify what is getting in the way of your retirement saving. 

This could include things like the debt you hold or other competing or more immediate expenses. That’s not to say you need to ignore current expenses and only focus on long-term saving. There’ll be a balance in between the two, but you’ll definitely not want to ignore long-term saving for retirement. 

What not to do: 

  • Don’t put your head in the sand. It can be hard to get started with retirement savings, but the key thing is to start. While it could be tempting to wait longer, remember just how big this is: you’re saving to cover roughly 25 years - the sooner you get started, the better.

  • Don’t forget about inflation. As you’re looking to the future, the value of a dollar will change. We hear older generations talking about days when a movie cost a nickel or a new car under $2,500. Good news: Social Security is adjusted to keep pace with inflation. Wages are, too. 

  • Don’t forget to update your plan. Your life changes. The retirement plan you make today may need updates, too. From time to time, be sure to circle back and make changes that reflect where you are in your life today and what you envision in your future.

We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment education, and integration with leading payroll providers.

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