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Will you Survive Retirement?

Over the years, prosperity rose, quality of life improved, and life expectancy increased drastically. Life expectancy in 1900 was only 46.3 years old for men and 48.3 years old for women while just fifty years later in the 1950s, it was up to 65.6 years old for men and 71.1 years old for women. Nowadays, the probability for a baby boomer to live through his or her 80s is almost half.

 

How old will you live - How to plan retirement

Source: JP Morgan Funds

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With life expectancy going up, so does the average years one will enjoy in retirement. Even when retiring at an average age of 62 years old (in the U.S. as of March 2016) one can expect a long retirement ahead with considerable inflation to come over that period.

 

How much will I spend in retirement

Source: JP Morgan Funds

 

Now, you can imagine what inflation can do to your spending if you plan to retire early (like at 35, for example). Using historical data, an early retiree that would have enjoyed retirement from the age of 35 (retiring in 1972) to 80 (present) would have experienced a 483.3% increase in the consumer price index. This means that the dollar saved in 1972 would only be worth 20¢ today if kept under the mattress.

Looking back at the last 75 years, we can clearly see how spending has increased over time in some of the most expensive categories such as healthcare, transportation, and housing.

 

Inflation and your retirementClick to zoom in. Source: How Much

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American are now spending more and trends are only pointing up. Even after inflation, health care spending has more than doubled over the period while transportation has almost tripled. As for housing, the average American now spends twice as much as in the 1940s.

Health care prices, for example, have mostly been influenced by policies and regulations. With many for-profit hospitals marking up prices 1000%, it is not surprising to see the average spending increasing.

On the other hand, transportation spending has been fueled by some of the biggest advertising budgets in marketing to convince regular people to buy bigger and pricier cars. In 2015, the automotive industry was the 2nd biggest advertising purchaser in the U.S. with General Motors alone spending over $3.1 billion dollars. With easy financing and more luxurious car options, the average new car purchase price has now risen to over $34,000. The cars our grandparents drove did not come with screens, leather seats were only in high-end german cars, and SUVs were for the countryside, not for the glamor.

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Land rover suv’72 Range Rover. No leather seats, no chrome rims, and not for suburban moms.

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It is hard to believe that the average American spent more on food than on housing in the 1940s but with better production methods, international imports, and raise of fast-food, the cost of food has dropped over time. As per housing, we cannot argue that there were some local pressures that skyrocketed prices in markets such as New York or San Francisco and population growth played a big part but one of the biggest increase in spending came from the immense expansion of the average American house. Average new homes are now 1,000 square feet larger than those in 1973, and the average living space per person has doubled over last 40 years. Your grandparents, even your parents, probably shared rooms as a kid and only had one living room. Houses were built with a single bathroom and you could not walk in a closet. All this space does come at a cost.

The best advice we can give you to counter these trends is to combat lifestyle inflation. Your biggest obstacle is not yearly inflation, it is your own materialistic wants and wishes. We drive ten-year-old cars and they are perfectly fine for our needs. We do not need two living rooms and you probably do not either.

Minimizing your spending today means that you will need less in retirement and, therefore, means that you will be able to reach financial independence sooner.

 

How to save enough for retirement

That dollar saved in 1972 would now only be worth 20 cents if kept under the mattress but if it had been invested in a simple S&P 500 index fund with all dividends reinvested, it would have grown 8061.975%. This is still a total return of 1299.190% after inflation, an annualized return of 6.039%. In this case, a dollar would have grown to $12.99 after inflation.

The secret is to start investing early and to stay consistent. In the example below, we illustrate how a constant $5,000 yearly investment can grow over time in different scenarios.

 

How to start investing

Source: JP Morgan Funds

 

In addition, a long time horizon also amplifies the advantages of tax-differed accounts. If you start investing early and invest in a tax-advantaged account such as an RSP (401k), you can greatly increase your potential retirement savings. In the chart below, we illustrate how a long-term investor would benefit from a tax-differed account even after paying taxes at withdrawal. In this example, one would invest a lump-sum of $100,000 for a 30 year period and would be in a 28% tax bracket.

 

How to invest in 401k

Source: JP Morgan Funds

 

Even if you need to pay taxes once you withdraw from your RSP (401k), the long-term benefits of tax shelters are staggering. Depending on your withdrawal method and time-horizon, you could also end up paying no taxes at all in retirement like bloggers GoCurryCracker.

 

Time in the market, not timing the market

In the end, whether you choose to invest in tax-advantaged accounts or not, your biggest gains will come from a few, amazing days in the market.

Missing only 10 of the best days resulted in returns of nearly half the actual market returns and missing the 30 best days actually averaged negative returns.

 

Historical returns of market

Source: JP Morgan Funds

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The thing is; no one can predict which days will turn out to be the best ones. In 2015, the best day of the year occurred only 2 days after the worst day of the year! Guess what happened to everyone that tried to time the market or sold when the market was down because they thought they could out-smart the market? They missed the best day of the year.

If we cannot guess the top days before it is too late then invest in the market and stay in the market to optimize your returns.

When planning for your retirement, time is on your side. Use it. Invest in a broadly-diversified index fund (or a combination of them like us) and stay invested for the long-run.

Best of luck, Xyz.

 

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6 Comments

  1. Thanks, great article.

  2. Great post. One of my greatest fears is outliving my retirement savings, especially since I plan on retiring early. My nest egg will need to last about 40-ish years. Add to that inflation and costs of future healthcare, and retirement can be a bit scary.

    I guess it comes down to having a financial plan and staying invested over the long term.

  3. I’m always running into suburban moms that drive range rovers. I bet they wouldn’t drive that classic you have a pic of. Vintage!

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