When you plan for retirement, you plan for the long term – all the way to the end of your life. You don’t even know how long you’ll live, so how can you tell whether you’re on track to retire?
If you’re maxing out your retirement plan contributions, growing your savings, or increasing your home equity, those are good signs. But those indicators tell you about the present. To know whether you’re on track to retire, you need to look to the future.
I presented a webinar called, When Can I Retire? on this very subject. The Sensible team has also written articles and presented other webinars about retirement planning and calculating how much you’ll need to retire.
Your lifetime balance sheet
You’ll need a lifetime financial plan to create your lifetime balance sheet. And your lifetime balance sheet can tell you whether you’re on track to retire comfortably. To start your plan, you’ll need to calculate your resources and expenses.
Lifetime Financial Plan Resources
- Social security benefits
- Earnings, now through retirement
- Savings in taxable accounts
- Retirement savings
Lifetime Financial Plan Expenses
- Housing expenses
- Insurance premiums
- Taxes
- Special expenses, like big vacations or your kids’ college education
- Discretionary spending
Subtract your lifetime expenses from your lifetime resources. If it leaves a surplus, you’re on track to retire. Sounds simple, right? Not exactly. It’s impossible to be precise since you’re planning so far into the future. There are a lot of factors to consider but the more care you take with your calculations, the more confident you can be.
Once you have built your lifetime balance sheet, you can think about how you might change it if you don’t like what it says about when and how comfortably you can retire.
It’s easier to add to your financial resources when you’re working. You can increase your hours or take a higher-paying job. But once you retire, you stop earning money from work.
You can also modify your financial expenses by changing your spending habits. Your spending now affects your savings for retirement, and how much you plan to spend during retirement affects how much you need to save. You don’t want to spend so much now that you under-save for retirement. On the other hand, you don’t want to miss out on all the fun now just so you can (maybe) party in your 70s. Ideally, your spending during your career and during retirement should match. Figuring out how to make that happen is an important part of your lifetime financial plan.
The impact of planned lifespan
To know if you’re on track to retire, you need to determine if you’re saving enough. You find out how much you need to save by looking at how many years you’ll be retired. Let’s see what happens with Steve and Tina Yall (our fictional clients in this scenario) in four different lifespan scenarios. Will planning for a shorter lifespan let them retire earlier? Is that wise?
| Retirement age | Planned lifespan | Yearly affordable spending in retirement |
| 65 | 100 | $38,000 |
| 65 | 90 | $43,000 |
| 64 | 90 | $40,000 |
| 63 | 90 | $37,000 |
A planned lifespan 10 years shorter allows the Yalls to retire one to two years earlier and still spend the same amount. That’s not much of a difference.
What would let them retire much earlier? Well, imagine that Steve buys Tina a lottery ticket and they win $1,000,000. After taxes, they’d have an extra $550,000. Now their options look like this:
| Retirement age | Expected lifespan | Yearly spending in retirement |
| 65 | 100 | $61,000 |
| 65 | 90 | $72,000 |
| 64 | 90 | $69,000 |
| 61 | 90 | $62,000 |
Those lottery winnings (the extra money) and the planned shorter lifespan mean the Yalls can retire four years earlier. Why did the extra money make such a difference? It’s because of the role Social Security plays in retirement plans.
Retiring when Social Security is 80 percent of your retirement
To understand how Social Security affects the age you can retire, let’s look at another fictional client couple, Carl and Andre Youse.
In the first scenario, the Youses plan to retire at 65. They’re on track – they have enough assets to support their spending. Those assets are 20 percent of what they need to support them through their retirement. Social Security benefits make up the remaining 80 percent.
If Carl and Andre reduce their expected lifespan by 10 years — from 100 to 90 — they can retire two years earlier without reducing their spending. Because they planned to pay 20 percent of their spending for the 10 years they removed, they can now afford to pay 100 percent for two years of retirement without Social Security.
Retiring when Social Security is 20 percent of your retirement
In a second scenario, Carl and Andrew are paying for 80 percent of their spending during retirement. Social Security benefits are only covering 20 percent. If the Youses’ life expectancy goes down to 90, the 80 percent they would have been paying from age 90 to age 100 can pay for 100 percent of eight years, allowing them to retire at 57.
So, yes, your planned lifespan can have a significant effect on when you can afford to retire. But keep in mind that the ratio of Social Security benefits to retirement assets in your plan modifies the effect.
Why shouldn’t I lower my planned lifespan to retire sooner?
You might be tempted to plan to retire earlier by choosing a shorter lifespan in your plan. Sensible Financial cautions against that because it’s very risky. Here’s why:
- Predictions about your life expectancy are based on averages. As of 2021, the current life expectancy for Americans is 76 years. Because 76 is the average, you have a 50% chance of living past age 76.
- People usually underestimate their own lifespans. Surveys asking people how long they expect to live consistently give lower ages than actuaries calculate.
- Forecasting your lifespan based on your parents’ or grandparents’ lifespans will make you undershoot. People are living longer than they used to. The average life expectancy for Americans has risen 6 years since 1960. You will probably live longer than your elders.
- If you’re wrong, your ability to adjust is small. If you run out of money during retirement because you lived longer than you expected, there’s not much you can do about it– it’s hard to find a job at 90!
Occasionally it does make sense to lower your planned life expectancy. For example, if you have a terminal illness or a chronic health condition that reduces your lifespan, it’s realistic to assume you won’t live to 100. However, outside of those circumstances, basing your retirement on a lower lifespan is risky.
So, are you on track to retire? If you have your lifetime balance sheet and you know where to set your life expectancy, you know how to find out. Good luck planning a safe and comfortable retirement! If you want help planning your retirement, Sensible Financial is here to advise you. Request an appointment with one of our experts and we can plan together.