I apologize in advance for the negative tone of this week’s “Slap in the Face” Award. But here’s a wake-up call for everyone considering retirement in the next few years. Things are really getting ugly…
Retirement costs twice as much as it did 25 years ago.
[ad#Google Adsense 336×280-IA]That was just 1991, which seems like last year to me.
And, no, this is not about inflation.
It’s about something called the “annuity factor,” which is a function of interest rates and longevity used by actuaries.
The annuity factor represents the money needed to maintain your lifestyle consistently in retirement.
The higher the annuity factor, the more you need in retirement.
And the annuity factor has never been higher than it is right now! But you don’t have to be an actuary to understand why.
As we all know, longevity is increasing. If we make it to age 65, 85 is very likely in our future. Obviously, it costs a lot more to live to 85 than it does to live until 75.
And as everyone knows, interest rates have been way down for a long time… and they show no signs of improving. They’re the lowest rates of our lifetime, and they’ve eaten away at our yields as they’ve declined.
MarketWatch recently published a fascinating article on the topic. Here’s how they broke it down…
In 1991, $100,000 in savings produced $11,600 in annuity factor income.
Today, a 65-year-old retiree can expect only $5,900 worth of annuity factor income for every $100,000 saved.
It’s easy to understand why, too.
In 1991, the 10-year Treasury was paying around 8%. Today, it pays just 1.6%.
When you add the cost of our increasing life spans to the fact that we need $1.77 today to buy what $1 bought in 1991, it gets ugly.
And here comes the ugliest part…
One survey reports 60% of workers who actually have retirement plans have saved nothing.
And I’m sure these folks won’t be abandoned on the roadside naked and starving.
We, the retirement savers (the 2 1/2 people working for every person collecting benefits), will pay those bills, too. That means higher taxes for the savers and workers. And that’s another cost!
There’s no other solution than saving earlier in life, saving more and working longer.
To make this work, the retirement age has to be increased well into the 70s. It also means more of our income will be taxed by Social Security, and we can look out for lower payouts from Social Security.
We, the boomers, may get the benefits we’ve been promised at the current full retirement age, but our kids definitely won’t. Plan accordingly, folks.
Good investing,
Steve
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Source: Wealthy Retirement