No matter how diligent we are in our retirement planning, blind spots can work against us and sabotage our efforts. These three should propel us to save more aggressively and invest wisely.
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The risk of losing your job.
Retirement researcher David Blanchett pointed out in his report The Retirement Mirage, that choosing when to retire is one of the single most important financial decisions we make in our lives. Because it is this factor that helps determine how much money we need to save, where it must be invested, and our standard of living in the meantime.
But expectations don’t always match reality, and even the most well laid out plans can go horribly wrong. There could be health issues or retrenchment and the impact can be severe.
Imagine the negative implications on your retirement plan should you be forced to retire four years ahead of schedule. If you delay retirement by just 12 months, you have got one more year to save, one more year for your assets to grow, one more year of contribution to your provident fund, and one less year to worry about retirement. Early retirement does the exact opposite. And you probably end up in a situation where you're not going to have enough saved, because it is in those last few years that people really turbocharge their savings.
If one retires early and lives longer, it’s a double whammy. Which brings us to our next point.
Sandra Tsing Loh
once said with a dose of humour, “In 1900, the average life expectancy of a U.S. citizen was 48, so most menopausal women were dead, which is not a great place to be.” Though spoken in jest, it pointed to an important blind spot and largest risk related to retiring: the longevity risk.
According to a World Economic Forum report, we better be prepared to blow out over 100 candles on our birthday cakes. Those born in 1947, have an average life expectancy of 85 years, it goes up to 103 for those born in 2007. According to MacroTrends, the average life expectancy in India has risen from 35 years (1950) to around 70 years (2023). But if you have not suffered from malnutrition, are in good health, and have access to healthcare, the average is certainly no indication.
The exponential growth of changes in longevity are due to advances in medicine, neuroscience, bioinformatics, 3D printing, nanotechnology, genetic engineering and so on. They are contributing to longer life spans. The leading causes of death have been cured. What has been killing people in their 80s and 90s, is now going to allow us to live to age 100-plus.
With the longevity risk comes a shortfall risk: the possibility of outliving one’s savings. In fact, to cover for the longevity and shortfall risks, and considering that 94 years is an average life expectancy, one should develop one’s retirement plan with the expectation of living to 100.
A person’s retirement age is simply too unpredictable. Plan accordingly to help avoid negative surprises. Some investors may need to double their current savings to achieve their retirement targets.
Morningstar’s director of personal finance, Christine Benz, sums it up well.
You often read about all the money you'll save when you're no longer working--on dry-cleaning, commuting, lunches out, and not having to save so much for retirement anymore. Given that cavalcade of savings, it's not surprising that so many retirees fall back on the conventional wisdom that they'll only need to replace 80% of their income during their working years when they actually retire. In reality, that is at best a rule of thumb; some retirees actually spend more than they did while they were working, while others spend much less. Healthcare costs are one of the biggest wild cards.
One area where expenses can definitely explode is healthcare for the last period of one’s life, which could range from a few months, to a few years.
No one likes to imagine a day when they might not be able to care for themselves. But for many, spending your later years in an assisted care facility or nursing home or employing special help at home is a reality.
Also, don’t forget the trips to the dentist and ophthalmologist. Inflation is very evident in these expenses. As well as medication for our illness, such as blood pressure, diabetes or cholesterol.
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