Are you saving enough for retirement?
Here's good news for pilots who are retired or near retirement: we're living longer and are staying healthier than previous generations. Life expectancy for those now age 65 is 86 for men and 88 for women, and a 2013 study by researchers at Harvard University found that as life expectancy increased, people became healthier in later life.1 Many older adults in previous generations were ill for the final six or seven years of their lives, but that is far less common now, meaning the later years are more likely healthy and active.
The flip side of that good news is extended lifespans mean your nest egg must last longer, perhaps thirty years or more. And research shows many investors are not saving enough for retirement, despite the wide availability and popularity of 401(k) accounts, IRAs, and other investment vehicles and opportunities. That is true even among pilots, who are among the more savvy investors.
The basic challenge regarding retirement savings is determining how much is enough. There are many ways to calculate how much to save. Some more simplistic methods suggest accumulating some multiple of your final annual gross salary, ranging from 10 to 20 times that amount. For investors in their 30s or 40s, others suggest saving 10% of annual income for basic retirement expenses; 15% for a more comfortable lifestyle; and 20% for potential early retirement. Another option is to target your savings to an amount that can generate 70 to 90 percent of your pretax, pre‐retirement salary annually. You then can calculate how much you need to save each year to reach that goal. But these simplistic targets may fail to realistically evaluate what your actual needs in retirement will be.
It's most important to estimate what your real spending in retirement is likely to be by determining the lifestyle you'd like to have in retirement. For example, if you'd like to travel in retirement, you'll need to plan for that in addition to your basic expenses.
The key to successful planning is a comprehensive financial plan that considers both anticipated income and expenses well in advance of retirement. The income side of the plan includes income from all sources such as company retirement plans or pensions, 401(k)s, IRAs or other retirement accounts, insurance, investment accounts, cash reserves and possible inheritances. The expense side looks at normal expenses for mortgage, food, cars, health care, clothing, travel, entertainment and similar items. The plan then projects whether your nest egg—based on your projected income, expenses and life expectancy—is likely to last.
For individuals who are nearing retirement, you can consider delaying retirement or working part time to make your savings last longer. But there are other steps you can take when working towards a comfortable retirement.
Determine whether you are financially ready – Examine your financials, including balances of all your accounts, your income tax rate, the average rate of return on your investments and your current income, and your current rate of savings. In addition, list your likely expenses for regular living costs, such as housing, food, insurance, medical, clothing and entertainment. Estimate what you can put aside or are likely to need for unexpected costs such as an accident or serious illness, home and auto repairs, or nursing care. Once you have that information, you can project the income you are likely to have at your planned retirement date and whether you can afford the lifestyle you desire. If you come up short, you can adjust your savings and spending to try to catch up.
Maximize your savings – General advice for individuals whose employers offer 401(k) or other retirement plans often includes saving at least the amount of the employer match. However, as you get closer to retirement, it's best to save as much as possible; in 2018, that is up to the maximum of $18,500 per year, with an additional $6,000 allowed for those over age 50. Put any additional savings into IRAs, Roth IRAs or other retirement accounts.
Put your pay raises to work – Each time you receive a raise, consider putting all or a portion of it into your retirement savings. If you do this as soon as you receive each raise, you won't miss the money and you will build your nest egg.
Maintain a diversified portfolio – As important as equities are to building long‐term wealth, diversify risk with other investments such as bonds, international investments, and even some alternative investments. As you get closer to retirement, you might choose to be more conservative with your investments because there is less time to recover from losses. The goal is to create a portfolio with a variety of investments that can perform well in different environments.
Don't waste money – It may seem simplistic, but it's worth considering. A little luxury is fine, but take a hard look and decide whether you can cut some costs. Do you really need the latest cellphone? Must you take a spring break or ski trip every year? Do you need to get a new car every few years? Are you eating out at expensive restaurants often?
Consider delaying Social Security benefits – Although most individuals can begin claiming Social Security benefits at age 62, you can increase your eventual Social Security monthly income significantly by deferring the benefit until you are older. For example, according to socialsecurity.gov, if your full retirement age is 66 and your monthly benefit at that age is $1,300, delaying to the maximum of age 70 increases your monthly benefit to $1,681—a 29% increase. In contrast, if you take Social Security early, at age 62, your monthly benefit is reduced to $953, a 76% decrease vs. waiting until age 70. A delay of even one or two years will increase your monthly benefit and is worth considering. Cost of Living Adjustment (COLA) on this higher benefit is an additional advantage and a good hedge against longevity.
Give your plan a stress test – Give some serious thought to unexpected occurrences and worst case scenarios to help determine whether you have the financial means to cope. For example, think whether you're equipped to handle a serious illness, unexpected medical bills, the death of a spouse or moving out of your home because of a natural disaster or because you need assisted living or nursing care.
Ultimately, evaluating your finances—and your financial goals—well before retirement can help reduce any concern about your financial future. Understanding potential risks and making sure you're able to deal with varying conditions helps steer you towards a comfortable retirement.
1 Harvard Gazette, July 2013. https://news.harvard.edu/gazette/story/2013/07/good-health-longer/
by Robert Warner
Robert Warner is Managing Director, The Pilot Program, Johnson Financial Group and EVP Johnson Wealth, a Johnson Financial Group Company. He is also a Chartered Financial Consultant (ChFC®). He has over 25 years experience helping clients, including active pilots and their families achieve their retirement and estate planning goals with an emphasis on estate conservation and wealth transfer planning.READ MORE about Bob Warner.
Johnson Financial Group and its subsidiaries do not provide tax advice. Please consult your tax advisor with respect to your personal situation. Wealth management services are provided through Johnson Bank and Johnson Wealth Inc., Johnson Financial Group companies. Additional information about Johnson Wealth Inc., a registered investment adviser, and its investment adviser representatives is available at https://www.adviserinfo.sec.gov/. NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE