It’s time for Americans to
face the reality of retirement planning. Considering that defined
benefit plans are moving closer to full extinction each year, it’s now
more important than ever for individuals to save for retirement. This is
not always an easy process, but you can improve your odds of an ideal
retirement by educating yourself and planning for it as soon as
possible.
Millions of Americans are worried about their
so-called golden years — with good reason. According to Bankrate.com,
28% of Americans say high medical bills are their top financial concern about retirement.
Making matters worse, higher income provides little comfort. Households
making more than $75,000 are actually more worried about medical
expenses than the overall population. Meanwhile, 23% of Americans say
running out of savings is their biggest financial concern, followed by
18% who say unaffordable daily expenses. Eleven percent of Americans are
most worried about having too much debt in retirement.
With stagnant wages, rising living expenses,
and an overall sluggish labor market, numerous obstacles face workers
trying to save for retirement, but no one cares about your financial
future as much as you. Let’s take a look at seven charts that are
crucial to the retirement planning process.
Your Reaction?
Source: JPMorgan
1. Life expectancy
As you near the typical retirement age, the
probability of you living for another decade or two is remarkably high.
Men age 65 today have a 78% chance of living another 10 years, while
women have an 85% chance. The odds of a long life increase dramatically
for couples. In fact, couples age 65 today have an astounding 97% chance
that at least one of them lives another 10 years and an 89% chance that
one experiences their 80-year birthday. It almost comes down to a coin
flip that at least one person in the relationship lives to 90.
In short, you should plan on living to at
least 90 years old or perhaps even longer, depending on your family
history. While more people are working beyond the age of 65, that
doesn’t mean you should assume you will be able to do so. JPMorgan finds
that almost 70% of actual retirees left the workforce before age 65,
primarily due to health problems or disabilities.
Your Reaction?
Source: JPMorgan
2. Saving early
We’ve all heard it before: You need to start
saving for retirement as soon as possible. It’s a simple concept, but
many people fail to understand the long-term effects of saving and
investing early. As the chart above shows, a person who invests $5,000
annually between the ages of 25 and 35 will have an estimated $563,000
at age 65, assuming a 7% annual return. In comparison, a person who
invests $5,000 between the ages of 35 and 65 will have about $58,000
less.
Market returns are not guaranteed and are
certainly more volatile than 7% each year, but the math shows the
benefits of compounding returns. The earlier you start, the better your
chances of reaching your financial goals. Your chances also improve if
you start early and keep a consistent pace. A person who invests $5,000
annually between the ages of 25 and 65 could accumulate more than $1
million for retirement.
Your Reaction?
Source: JPMorgan
3. Spending habits
Predicting your exact income needs for
retirement decades in advance is impossible. Nonetheless, you should
recognize that you may have more expenses than you think. On average,
American household spending peaks at age of 45. However, as the chart
above shows, there are still significant costs after the peak and during
retirement.
The average spending for 65- to 74-year-olds
totals $44,897 per year — not exactly chump change. If you plan on
traveling in retirement, your costs could be even higher. Additionally, healthcare is the one category of spending
that fails to log a decrease. If you invest in nothing else for
retirement, at least invest in your health. Eliminating mortgage debt
and making sure your house fits your actual needs is also helpful in
reducing retirement expenses, as housing-related costs represented the
largest portion of spending among all age groups.
Your Reaction?
Source: JPMorgan
4. Nursing home expenses
One of the most overlooked retirement costs
may also be one of the most expensive. JPMorgan finds that the cost of a
private room nursing care facility for one year can vary from $80,000
to over $120,000, depending on where you live. However, majority of
Americans underestimate the costs of nursing home care and are
neglecting the need to save for it.
Nearly 57% of Americans believe a year in a nursing home will cost
them less than $75,000, according to a recent survey by MoneyRates.com.
A study by MetLife finds that even semi-private rooms cost an average
of $81,030 per year. Furthermore, the average cost of a semi-private
room in the New York City area is $141,620, which is 75% higher than the
national average. In contrast, Louisiana, Alabama, Oklahoma, and
Missouri offer some of the cheapest long-term care services in the
country.
Your Reaction?
Source: JPMorgan
5. Social Security
If you can, delaying Social Security benefits
may help you achieve a more secure retirement. The top graphic
illustrates how people born 1943 to 1954 can receive 32% more in a
benefit check by waiting until age 70 to claim Social Security, compared
to the full retirement age of 66. At age 62, beneficiaries receive only
75% of what they would get if they waited until age 66. The bottom
graphic shows the trade-offs for younger individuals, which penalizes
early claiming by offering 70% of benefits at age 62. Delaying benefits
until age 70 results in 124% more benefits than age 66.
If you have a health problem or family
history indicating you will not live for decades beyond age 62, you may
want to claim Social Security as soon as possible so that you have time
to enjoy the fruits of your labor. On the other hand, if your health and
finances are stable, you may want to wait. The Social Security
Administration now offers online accounts so that Americans can stay up to date on their financial situations.
Your Reaction?
Source: JPMorgan
6. Investing
Due to inflation eroding the value of money,
it’s not enough to simply let your savings sit in cash. One dollar
invested in Treasury bills in 1950 would have only grown to $16 in 2013.
However, that same dollar invested in large-cap stocks would have grown
to $969, while small-cap stocks would have grown that dollar into
$4,260. There are certainly other investment choices than stocks, but
this illustration reminds investors that cash is a terrible wealth
generator over the long term.
Warren Buffett once explained how investors should view cash.
He said: “The one thing I will tell you is the worst investment you can
have is cash. Everybody is talking about cash being king and all that
sort of thing. Cash is going to become worth less over time. But good
businesses are going to become worth more over time. And you don’t want
to pay too much for them so you have to have some discipline about what
you pay.”
“But the thing to do is find a good business
and stick with it. We always keep enough cash around so I feel very
comfortable and don’t worry about sleeping at night. But it’s not
because I like cash as an investment. Cash is a bad investment over
time. But you always want to have enough so that nobody else can
determine your future essentially.”
Your Reaction?
Source: JPMorgan
7. Market timing
Unless you’re a day trader, you should not be
trying to time the market. With the rise of smartphones and tablets,
investors are constantly plugged into financial markets, but that
doesn’t mean you should always be doing something with your portfolio.
The average Joe is typically better off with a diversified portfolio
built for the long term. Trying to time the market can be disastrous,
especially when it comes to stocks and your retirement.
As the chart above shows, $10,000 invested
between January 3, 1995, and December 31, 2014, would have grown to
$65,453 if it was constantly invested in the S&P 500. If you missed
the 10 best days during that period, the investment would have grown to
only $32,665, just less than half of the amount if you simply left the
money untouched. Critics rightly point out that missing the worst days
in the market is even better for a portfolio, but that is a dangerous
strategy for most investors.
Even if you rightly time the market and avoid
the worst days, you are then left with the agonizing decision of when
to get back into the market. You need to know yourself and your
limitations when investing. Six of the 10 best days during the stated
time period occurred within two weeks of the 10 worst days.
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