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Evolution of Retirement
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Retirement Expenses Are Too Hard to Predict

Social Security isn’t enough to live on, and private retirement planning expects Americans to know the unknowable. Can’t the U.S. do better?

(Bloomberg Opinion) -- Most people budget not for true emergencies — which are, thankfully, rare — but for what we might call predictable surprises. For example, there is no such thing as emergency vehicle or home repair. All cars and homes will require repairs and maintenance, even if you don’t know when. For true car or home emergencies, there’s insurance.

Saving for retirement in America is so difficult in part because the surprises are so unpredictable — not to mention unpleasant: inflation, outliving your money, going to a nursing home. And our insurance — Social Security — is inadequate. The impossible task of retirement planning reminds me of a New Yorker cartoon I cut out and saved for so long it’s turned yellow: One member of a couple looks up triumphantly from a kitchen table covered in papers and says, "If we take a late retirement and an early death, we’ll just squeak by."

Social Security ought to be a nearly perfect way to manage retirement uncertainty: Social Security pays a benefit no matter how long you live and is adjusted for inflation. But it’s too small to live on, so we must have other sources of income.

Only a few Americans who are very rich or who live on traditional defined-benefit pensions don’t fear running out of money. My mother, for example, lived on less than $25,000 per year. She was so worried about money she avoided visiting her friends. When she died suddenly at age 84, she had plenty left. Seeing all the money she saved for emergencies made me sad.

But of course, none of us know when our time will be up. Retirement planning requires playing the longevity guessing game. Compared with actuarial life tables, males tend to overestimate, and women underestimate, their life expectancy. To more accurately predict the unknowable, you can look at U.S. Vital Statistics: In 2019, a 65-year-old White woman could expect to live an additional 21 years; her Black male counterpart another 17 years. Life expectancy calculations by socioeconomic class are more complicated, but the Brookings Institution provides one of the best. According to them, women born in 1940 in the top 10% of household earnings who lived to age 50 were expected to live another 28.5 years. Women in the bottom 10% who lived to age 50 were expected to live only another 22.2 years. Rich people have more of everything, including life span.

All this uncertainty makes planning for retirement harder. Consider: Someone making average earnings, about $70,000 per year, at 65, needs $750,000 to supplement Social Security to maintain living standards for 25 years. Assuming a life expectancy of 85, not 90, reduces the number to $650,000. That’s a big difference!

You can plan perfectly and still be surprised. I knew one couple, married for 40 years, who worked good professional jobs longer than they had to so they’d be sure they’d have enough. Two months after they left their cold Northern city to spend their golden years in the sunny Southwest, the wife was diagnosed with terminal cancer. Before her diagnosis, longevity tables predicted she would live another 20 years. Instead, she died three years later. They’d followed expert advice to a T. An early death was possible, just not probable or predictable.

What about saving for a nursing home? This is an area where most of us worry more than we should. Only about one-third of Americans currently between the ages of 57 and 61 will spend any money on nursing home care at any point in their lives — and for 43% of people, private or public insurance will pay everything. Only 5% of us will fund long nursing home stays, costing $47,000 or more. (Commercial long-term care insurance is a bad bet for most people.)

Many people are able to save for life’s unpleasant surprises because they’re predictable. With retirement planning, the only thing that’s predictable is that it will be expensive. For decades, personal finance experts have nagged and shamed Americans to save more, but the average retirement account balance of 65-year-olds is just $225,000. About half of people have saved nothing at all. The vast majority of retirees do not have enough, no matter how long they live. We need universal retirement savings accounts, low-cost and inflation-indexed annuities, a strong Social Security system, and Medicare that pays for long-term care.

Because of the do-it-yourself nature of retirement saving, too many people outlive their savings or hoard money they should be spending — and everyone has too much anxiety. To plan correctly in this system, you need to know unknowable things. The US needs better systems to help people cope.

Note: Email me with a financial surprise you’re concerned about, and I'll write some advice about how to plan around it.

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To contact the author of this story:
Teresa Ghilarducci at [email protected]

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