To Retire or Not to Retire, the Looming Question

One of the most difficult questions for the tens of millions of baby boomers beginning to reach 60 years of age is when and whether to retire.  My uncle is in this camp.  He's 81 and still working full-time teaching psychiatry.  My aunt threw him a big surprise 80th birthday party last year because she never had a chance to throw him a retirement party.

Many won't retire, or at least not completely, because they like what they're doing.  Many won't retire because they can't afford to.  I had lunch with a friend the other day who told me about a friend of his who never saved for retirement and, unfortunately, had a major illness last year that wiped out what little he did have in home equity.  He's now trying to get back on his feet, but it could be another year before he's making ends meet.  He's 60 now with no retirement in sight.

But most people fall in the middle.  They would like to retire sometime, but they're not sure when they can afford to do so.  They don't want to outlive their savings, but they want to enjoy as meaning good years of leisure as possible.  There's living too long and there's working too long.

So many variables are involved and they are so unpredictable, that this is an extremely difficult calculation to make.

• How long will you live?
• Will you be healthy and independent or need care?
• Will you want to continue working part-time after retirement from full-time work?
• What rate of return will you receive on your investments?
• What will your cost of living be?  How will it be affected by inflation?  Will you spend more after you retire because you'll be traveling or maintaining two homes?  Or will you be spending less because you will move to a less expensive part of the country?

If you had definitive answers to all of these questions, you could figure out exactly when to retire.  But no one has such answers.  So its a question of best guess.

For myself and my wife, I recently did a relatively simple spreadsheet to see how much longer we will have to work.  Of course, it depends on the same variables described above.  But I assumed that our lifestyle would remain pretty much the same in retirement, simply increasing by the rate of inflation.

In terms of longevity, if you go by the Social Security Administration's tables, we can expect to live another 30 years.  Of course, that's only an average.  There's an interesting web site called www.RealAge.com which will adjust your age based on your medical history, your lifestyle, and the longevity of family members.  Based on that site, our real age is about seven years younger than our chronological age, giving us another six or so years in terms of longevity.

According to my simple spreadsheet, if we assume an average rate of inflation of 3 percent and an average rate of return of 5 percent, we will need to work another 14 years to make sure our savings will last us 22 years of retirement after that.  Of course, by then, who knows what any of the planning variables will look like?

Try this yourself.  Most investment firms have more sophisticated planning tools than my simple spreadsheet.  You can check some out at www.webcalcs.com, www.fidelity.com and www.vanguard.com.

Comments

[Michael Broad]

You say:

“According to my simple spreadsheet, if we assume an average rate of inflation of 3 percent and an average rate of return of 5 percent, we will need to work another 14 years to make sure our savings will last us 22 years of retirement after that.”

I’m writing to say that I think you might not be projecting out far enough. I don’t know your actual age but I’d guess mid 40s. But let’s even suppose you were 50, which would mean you’d be retiring in 14 years at age 64. Twenty-two years later you’d be 86, which I bet is pretty nearly the average life expectancy of a 64 year old man. So what’s the problem? It’s that AVERAGE part . . . given your analysis, I think you might have a (roughly) 50% chance of outliving your money if you retire in 14 years. I don’t want your wife to be mad at you for running out of money when you’re 92!

On the other hand, I think you can expect an average annual portfolio return of more like 8% to 8.5%, meaning 5% or 5.5% AFTER inflation, which means your money will grow a lot more in the next 36+ years. You’re not going to have a 100% bond portfolio, right?

Of course, it’s also possible that you’re actually old (like me) and that you’ve really projected out to age 95 … but I don’t think so.

Regards,

Michael Broad
PO Box 600307
Newtonville, MA 02460
(617) 549-5543