The Key Challenge in Retirement Planning

The prices of goods and services have risen an average of almost 3% annually since 2000. At that inflation rate, your income must double every 24 years to maintain your purchasing power. That doesn’t sound like much of a problem when you retire at age 65. But it means that you’ll need twice as much income at age 89. This is why new retirees are often in fine financial condition only to find themselves struggling financially in their elder years.

If you are 40 years old today, you will need twice as much money at age 63 and four times as much money at age 86. If your income is $100,000 today, you will need $400,000 in your 80s – just to maintain your current lifestyle. A 50-year-old earning $75,000 a year who plans to retire at 65 on that same income will need a net worth of $2.25 million, and their income in the first year of retirement must be $120,297 just to maintain the same purchasing power.

The second challenge compounds the first: longevity. At the time of the American Revolution, life expectancy at birth was 23 years. By 1900 it was 47. Today, most financial planners project their clients to live to 90 or 95 – and for younger clients, planning to age 100 is increasingly common. If you retire at 65 and live to 83 – just the average life expectancy – you will eat nearly 40,000 meals in retirement. Live to 90, and the number grows considerably.