Did your parents talk about using a retirement calculator when you were young? Depending on your age, they probably didn’t. That’s because many older Americans banked on Social Security and a pension to fund their retirement. They didn’t need a retirement calculator to plan. But when Social Security started in 1935, it was never intended to cover full retirement. The average life expectancy in 1935 was 61 for men and 64 for women. And with eligibility starting at 65, most elderly did not expect to use Social Security in retirement.
In 1961, the early retirement age was lowered to 62 and suddenly older adults relied on Social Security to help fund their retirement. After decades of working, saving, and paying off their mortgage, the average person could retire comfortably on a pension, a small savings, and Social Security. Living below their means and cutting expenses, retirees could live for a few years and not worry about outliving their money.
Fast forward nearly 90 years and this retirement plan is obsolete. The reason? Longevity. Gone are the days when Americans had to plan for a few years in retirement. The life expectancy of the oldest male baby boomer born in 1946 is 86.5 and 88.3 for females. That’s 24.5 years beyond the earliest retirement age for men and 26.3 years for women. And life expectancy goes up the longer you live.
That’s wonderful news if you have money to live on but not so great if you don’t. Outliving your money in retirement is a common fear among many older adults. Losing independence and depending on children or the government does not sit well with the workaholic generation. That’s why many pre-retirees turn to a retirement calculator for planning. And while this tool is helpful, there are reasons not to trust it. Here are 4 reasons your retirement calculator won’t work for you.
Faulty Assumptions. The information you put into a retirement calculator can greatly impact your projections. Entering accurate assumptions is critical to your plan. Assumptions to use are years in retirement, expected age of death, inflation rate, investment return, portfolio, and expenses. No retirement calculator can overcome faulty assumptions and it is best to overestimate to make sure you don’t outlive your money.
Your Death. No one can predict their death age. And not knowing this variable can change your plan significantly. Medical advances and healthy habits are creating longevity. So much in fact, that most financial planners have increased the death benchmark from 90 to 95. Unless you have a chronic illness or poor genetics, use a higher life expectancy in your retirement calculator.
Unexpected Expenses. COVID-19 drove this home in 2020. No one saw a pandemic coming let alone shutting down the world economy. Yet it happened. Unexpected expenses will happen. You can bank on this. The challenge is predicting what type of unexpected expenses to plan for. Most retirement plans include medical, current lifestyle, and living expenses. But if you don’t include some money for unexpected expenses, your financial calculator will fail.
Your Health. Not planning for long-term care will derail even the best of retirement plans. The challenge is that you don’t know when you will need long-term care. Notice when, not if. That’s because according to the U.S. government at least 75% of people over 65 will need long-term care at some point in their life. While you may be part of the 25%, the odds are you will probably need some type of long-term care as you age. Another fallout from COVID-19 is the risk of living the rest of your life in a nursing home. The safety of nursing homes is still in question. Your other choice is to age-in-place with home care. And while you may have a loving family to care for you, chances are you won’t want to rely on your children or spouse for care too long. This is especially true when you were independent your whole life and others depended on you. When using a retirement calculator remember to consider changes to your health and long-term care coverage.
Retirement calculators are planning tools. But they are never fail proof. If you are a do-it-yourself planner, there are many online retirement calculators to use. And although some do-it-yourself projects are ideal, for the most accurate retirement plan, consider using a professional. A Financial Advisor is highly trained to help identify risks a retirement calculator might miss.
Are you looking for more information on Financial Advisors in Northwest Indiana? Call Georgene at 219-315-6569 for more information. Planning your retirement? Try these retirement calculators to start your plan.
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