MoneyTip$ • Iowa State University Extension and Outreach

What if I Live to be 100?

January 23, 2023 Barb Wollan

When you reach your 60’s, as I have, you start taking a serious look at whether you are financially ready for retirement. As I talk with people about my own tentative plans, I frequently mention this concern: “What if I live to be 100?” Usually, people laugh.

I thought about that last week as I scanned a research report released last summer: “How Well Do Retirees Assess the Risks they Face in Retirement?” published by the Center for Retirement Research at Boston College. The research identified five major risks faced by retirees:

Longevity Risk – risk of outliving your money
Market Risk – market volatility
Health Risk – unusually high medical or long-term care costs
Family Risk – divorce, death of spouse, or needs of other family members
Policy Risk – mostly related to changes in Social Security

The research results suggest that people are NOT very good at recognizing which risks pose the greatest threat to their retirement wellbeing. Objectively speaking, the greatest risks are (in order): 1) longevity; 2) health; and 3) market. But when people are surveyed, they focus their primary attention on market risk – the risks of ups and downs in the economy during their retirement, with longevity risk second.

The moral of the story? Don’t laugh at me when I ask “What if I live to be 100?”

Seriously: the report makes clear that the average person does not pay enough attention to longevity risk. To build a financially secure retirement, we need to be prepared for the possibility that we might live a long time. For those of us whose entire retirement income, apart from Social Security, is held in 401ks, IRAs, and other similar accounts: we need to be prepared to stretch that money for 30 or more years. Even for those of us who have IPERS or some other guaranteed lifelong pension: we need to consider the impact inflation will have on that income over 30 years or longer.

Longevity Illustrator. Several years ago I discovered this tool created by the Society of Actuaries. It shows us the statistical probability of living to different ages. As a female in my early 60s, it tells me I have a 45% chance of living to age 90, a 23% chance of living to age 95, and an 8% chance of living to 100. Yes, the odds of living to 100 are fairly small but there is almost a 50-50 chance I’ll live to 90. That means I need to be prepared to live at least to 90 or 95. And if I want to play it safe, maybe 100!

I’d encourage you to check out the longevity illustrator for yourself, and consider the information as you review your retirement plans!

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

January 23, 2023

Financial wellbeing, Goals, Retirement longevity, Retirement, retirement risk

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Thinking About Retiring Early? Things to Consider…Part 2

May 3, 2022 Ryan Stuart

Welcome back for the second part of “Thinking About Retiring Early? Things to Consider”. Last month’s post focused on what happens to your income when retiring prior to the more common retirement ages of 55, 59 ½, 62, etc. This month will focus on how expenses are impacted when you decide to retire before you reach one of the ages mentioned above.

Historically speaking, “average” retirees may need approximately 80% of their pre-retirement income to maintain their current standard of living. The rationale behind this theory is that you will no longer have to pay for things like commuting, work attire, payroll taxes, certain employer-sponsored benefits, etc. While this may seem like a plus, things get a little tricky when you are looking to retire decades earlier than normal. Many retirees already have a difficult time stretching their funds over the course of a 20-year retirement (depending on your anticipated life expectancy) and tacking on another 20 years will only add to the complexity. This is primarily due to the additional estimation required in the retirement planning process, but also because of healthcare.

Managing the cost of healthcare

According to recent statistics from the Centers for Medicare and Medicaid Services, National Health Expenditures grew nearly 10%, or approximately $12,500 per person, in 2020 (partially due to the Covid-19 pandemic), and are projected to grow at an average annual rate of 5.4%, which outpaces inflation in most years. The problem for early retirees is that some of those costs are currently subsidized through their employer and/or the federal government; they will likely lose that subsidy with an early retirement. One option is the Healthcare Marketplace; however, eligibility for subsidies is impacted by income. The Health Insurance Marketplace Subsidy Calculator from the Kaiser Family Foundation can help to estimate your premium costs.

Whether you want to retire early or not, please remember that the decision is very personal, specific to your individual needs, and should not be based upon general guidance or the decisions of others. To learn more about the basics, visit our website at https://www.extension.iastate.edu/humansciences/money.

Ryan Stuart

Ryan is a Human Sciences Specialist in Family Wellbeing and an Accredited Financial Counselor®. He focuses on educating and empowering all Iowans to independently make positive financial decisions throughout their life course.

May 2, 2022

Consumer knowledge, Financial wellbeing, Insurance, Retirement early retirement, Goals, health insurance, Retirement

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Improve Retirement Readiness by Being Realistic About Social Security

June 17, 2021 Barb Wollan

We already know that the average American is financially under-prepared for retirement, putting them at risk for lifestyle cutbacks and even hardships in retirement. A recent study (University of Michigan Retirement and Disability Research Center) showed:

that having unrealistically high expectations for Social Security benefits contributes to inadequate retirement savings; and
that the majority of workers over-estimate what they will receive in Social Security retirement income.

Those two findings combine to suggest trouble ahead. And it doesn’t take TOO much thought to reach the conclusion that everyone needs realistic expectations about Social Security income in retirement. The good news? It’s pretty easy to obtain a reasonable estimate of your Social Security income!

The Social Security Administration offers two excellent tools we can use to obtain a good estimate of what our Social Security retirement benefit will be. Both involve entering personal data, so be sure to use a secure internet connection. The Retirement Estimator provides a personalized estimate of your benefit at three ages: 62; your full retirement age (which is between age 66 and 67); and age 70. By logging into your “My Social Security” account on-line, you can see even more: you can pick a precise age at which you wish to claim social security, rather than being limited to just three options, AND you can review the earnings record shown there to make sure that all your earnings are included. Note: about a month ago I talked with a woman whose record was missing her earnings for 2018 and 2019! It’s a good thing she checked! Without those figures, her Social Security income would have been lower than what she was supposed to receive.

Suppose you discover that your Social Security income is projected to be about $2,000/month (in today’s dollars). Then you can consider: do you want to live on $2,000/month after you retire? If you’d rather have more income to live on in retirement, that’s motivation to save and invest now! To get started, learn about retirement saving options available through your employer: if a 401(k) or other tax-advantaged plan is available to you, that can be a great option. If your employer will match your contributions to a retirement account, then be sure to take advantage of that match, as well.

For those who do not have a retirement savings option available through their job, be sure to check out your Individual Retirement Account (IRA) options. The IRS Publication 590A explains the rules associated with contributing to an IRA account. You may choose to consult with a financial adviser in deciding how to invest those funds – an IRA can be invested in any type of financial account, including mutual funds, a stock and/or bond portfolio, and money market accounts. Your choice of investments, along with your decisions about how much to save, will have a huge impact on your retirement well-being. The Financial Industry Regulatory Authority (FINRA) offers great learning materials for learning to invest and for choosing financial professionals.

Sources: Squared Away Blog: Workers Overestimate their Social Security, 6-17-21, from the Center for Retirement Research at Boston College; and
Prados, María J., and Arie Kapteyn. 2019. Subjective Expectations, Social Security Benefits, and the Optimal Path to Retirement, University of Michigan Retirement and Disability Research Center.

Barb Wollan

June 17, 2021

Retirement, Saving realistic, Retirement, Social Security

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Your Biggest Financial Decision

October 1, 2019 Barb Wollan

What’s the biggest financial decision you’ll ever make? Going to college? Buying a house? Maybe, but it may also be true that the biggest financial decision is the decision about when to claim Social Security. And that is a decision where you’ll hear people give opposite advice – some will recommend claiming early, and others encourage you to wait.

Because it’s a big decision, it’s worth exploring your options carefully using readily available online tools. Tool #1 is well-known, but read on to tool #2, as well, because it offers a bonus.

Tool #1: Set up your account at www.socialsecurity.gov and check out your options. Notice how your monthly Social Security income changes depending on your age at claim. You’ll notice that it’s not just what year, but also what month, that matters. For example, if you turn 67 in November, but really don’t have any plans until summer, working an extra 5 or 6 months will give you a higher monthly income.

Tool #2: Check out the Social Security Estimator from the Consumer Financial Protection Bureau (CFPB). Although this tool is not personalized to your individual history of work and earnings, it does something the Social Security tool does not. It shows the cumulative impact of your decision about when to claim.

Here’s how the CFPB tool works: You enter your birthdate, and type in how much has been your highest annual earned income in your career. Based on that, it estimates what your social security retirement benefit would be at your full retirement age, and at other ages between 62 and 70. When you select an age, it shows what your monthly income will be, AND (in the left margin) it shows the total amount you will receive from Social Security if you live to the average life expectancy of 85.

graphic depiction of output described. — Combined graphic showing calculator results at ages 62 and 70

I ran an example for a person born in 1960 whose highest earning level was $50,000/year. If they claimed at age 62 and lived till age 85, they would receive a monthly benefit of $1,112 and would have received a total of $305,800 from Social Security during their life. By contrast, if they claimed at age 70 and lived to age 85, their monthly benefit would be $1,958 and their total by age 85 would be $352,440. Note: all these figures would actually be higher, because of adjustments for inflation.

There is no “right” age to claim Social Security; your choice depends on your situation – your needs, other sources of income, health situation, and more. But using available tools, including the CFPB calculator which enables you to easily see the total impact of your decision at age 85, will help you make a well-informed decision. Find more retirement planning information our retirement resource page.

Barb Wollan

October 2, 2019

Consumer knowledge, Retirement financial decision, Retirement, Social Security

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Roth vs. Traditional – Understand your Options

January 19, 2017 Barb Wollan

If stepping up your retirement planning is part of your new year’s resolution, one key is to understand the pros and cons of traditional tax-deferred accounts in comparison with Roth accounts. Individual Retirement Accounts (IRAs) come in both “flavors,” and many employer accounts have both options as well.

The differences between Traditional and Roth affect your retirement in two main ways:

How much money you’ll be able to spend in retirement after taxes; and
Flexibility of withdrawals in retirement (this is affected in a couple of different ways).

Whether you are saving for retirement or are already retired and need to decide when to withdraw from which account, understanding the differences matters. To better understand how those differences play out and how you might put them to work for you, ISU Extension and Outreach has a new on-line mini-lesson (20 min). It’s part of our collection of retirement resources, which includes mini-lessons on five other topics and sixteen printable publications.

Catch this post on Facebook at https://tinyurl.com/yab2ael3

Barb Wollan

January 8, 2018

Goals, Retirement, Saving Retirement, Roth accounts, Traditional retirement accounts

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Year-End Statements = Opportunity

January 17, 2017 Barb Wollan

In the last ten days I have received year-end statements from all three of my retirement accounts. The arrival of these financial statements presents great reminder to do a retirement check-up. Now is the time to do a calculation to see whether your retirement investments are on track to give you a comfortable retirement.

There are many retirement calculators on-line; most investment firms have them. They’re not all the same; different calculators present information in different ways, using different assumptions and perhaps emphasizing different aspects of the situation.

Calculators often have built-in assumptions about things like inflation, life expectancy, or investment return. With that in mind:

Try to identify the key assumptions built into each calculator.
Use a variety of on-line calculators, rather than sticking with just one. Looking at the different responses you are given by different tools will make you familiar with a wider range of possibilities.

Most on-line calculators are commercial; they are posted by companies that have products or services to sell. Keep that sales motive in mind as you review the information you receive. Occasionally, a tool will subtly steer consumers toward a particular type of product. By being aware, you can avoid making decisions based on biased information.

Fortunately, there are free non-commercial retirement calculators available on-line as well. Here are two provided by non-commercial organizations:

Ballpark E$timate – This tool is, as its name suggests, a ballpark estimate. It doesn’t go into great detail. It is especially appropriate for people who are a long way from retirement, don’t have detailed retirement goals, but just want to be sure they’re on track.
Department of Labor Retirement Calculator – This tool provides detailed on-line worksheets for examining retirement expenses as well as your income. It is particularly useful for those who are fairly close to retirement and ready for more detailed planning.

If you work with a financial adviser, he or she plays a key role in your retirement planning; even then, however, it is wise to take an active role in the planning. Your adviser will be the first one to tell you that you must be the one to make the final decisions.

Barb Wollan

January 17, 2017

Goals, Retirement, Saving Retirement

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Tag: Retirement

What if I Live to be 100?

Barb Wollan

Thinking About Retiring Early? Things to Consider…Part 2

Ryan Stuart

Roth vs. Traditional – Understand your Options

Barb Wollan

Year-End Statements = Opportunity

Barb Wollan

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