When social insurance programs were enacted in the 1930s, the retirement age was set at 65 because half of workers were not expected to live past that age. Essentially, the “insurance” was to support people who lived beyond the average life expectancy.
Obviously that system can no longer work, says Olivia Mitchell, professor of insurance and risk management in “So You Want to Live to 100?” (Knowledge@Wharton, December 2009). If the present growth in life expectancy rates continues at the same rate, anyone born after 2000 could live to see their 100th birthday.
Raising the Retirement Age
In Europe, laws enforce mandatory retirement at 65 years of age. The United States, however, has no mandatory retirement age, allowing workers to remain on the job as long as they wish. But even in these cases, government pension plans still activate at age 65. That limit, says Mitchell, will have to move up to at least 70 in the next few years to support the baby boom generation.
Kaare Christensen, a professor at the Danish Ageing Research Centre at the University of Southern Denmark, suggests in “Ageing Populations: The Challenges Ahead” (The Lancet, Volume 374 Issue 9696, October 2009) that a healthier senior population along with the growth of knowledge work will have long term implications on retirement planning, allowing for more people to plan on work part-time longer. More older people working part-time means there will be more part-time jobs opening for younger people, says Christensen, redistributing work more evenly across populations.
With more people living longer, there will be an increased demand for healthcare, recreation and services, says Wharton finance professor Andy Abel in the same article. Meaning there will be a corresponding increase of jobs in healthcare, recreation and other services.
Changing Access to Affordable Healthcare
The article quotes Wharton health care management professor Mark V. Pauly who believes that just because the population will be living longer does not necessarily mean that there will be an increased strain on healthcare. The extra years will be healthy years, he said. It’s the last few years of a person’s life when healthcare expense increases and everyone will still have those years, just later.
But, keeping healthcare affordable is not a guaranteed scenario, Pauly adds. While the evidence shows that people are living longer in better physical health, there is less information about cognitive health in older people. Very little is known about brain function and dementia in older people. Unexpected healthcare costs may come up with populations attaining greater ages. It’s impossible to anticipate what they might be, he says.
If life expectancy rates continue to rise at their current level, there will have to be planning how retirement planning and affordable healthcare will be affected.
Using a Retirement Budget to Check Income Levels
Many people save all their working lives for retirement only to find that their income isn’t enough. Taking some time before they retire to assess how much money is needed may be useful. This can help identify shortfalls and additional actions that may need to be made before it is too late. How can a retirement planning worksheet help and what should it include?
Why are Retirement Budgets Important?
It’s easy to assume that savings and pensions will give enough of an income to live out a comfortable retirement. Unfortunately, this isn’t always the case. Fluctuations in investment markets and the recent recession have left many people with a shortfall between the income they need to live on when they retire and the money they have coming in.
Setting up a retirement budget plan before moving into this life stage may be useful. It can, for example, help individuals assess:
- How much money they may need to live on once they retire.
- How much income they are likely to have coming in.
- Whether there are any shortfalls between the two figures that they can make good.
Spotting any shortfalls early may simply make it easier to build up last minute funds or to take alternative measures to boost or manage retirement income.
What Should a Retirement Budget Include?
Basically, the aim here is to estimate how much money will be needed when the individual retires. A budget may, for example, include the costs of:
- Housing: This should include any outstanding mortgage/rental costs and estimated maintenance expenses.
- Insurance: This should incorporate any existing policies such as life, home, vehicle and healthcare.
- Utilities: This part of the budget needs to include all utility expenses including phone, heating, electricity, sewage and water costs as applicable.
- General living expenses: This should include the costs of groceries, entertainment, clothing, travel/vacations, garbage/recycling and vehicle running costs etc.
- Loans/financial commitments: Any loans or credit card debts that will still be outstanding in retirement should also be included as part of the budget.
- Taxes: Any taxation costs also need to be factored into the overall budget.
- Medical Expenses: Those without healthcare insurance may need to include estimated costs for healthcare.
Bear in mind that although some pre-retirement expenses may be reduced or may not be applicable at this stage (i.e. mortgages may be repaid) some expenses may actually increase once the individual has stopped working. There may be, for example, increased utility costs if the individual is now at home all day or a greater need for cash to cover medical treatments.
How to Set up a Retirement Budget Worksheet
This kind of worksheet can easily be set up by the individual for themselves if they can set up their own spreadsheet planner. There are, however, also plenty of readymade budget plans available online that may save some time and make things easier. Microsoft, for example, has an Excel based retirement budget that is available for free download that may be useful.
A Retirement Income Planning Calculator May Also be Useful
Although many of these expenses may be based on estimates at this stage this is still a useful exercise. The ball-park figure that is reached is an essential part of the overall retirement planning process.
As part of this process it may, for example, be useful to use a retirement planning calculator to get an estimate of how much income will be coming in. This can then be compared to the spending budget to assess any problem areas.
Those that worry that their savings will outlive them may also want to consider longevity insurance. In some cases it may be wise to try and boost savings/take alternative measures to increase retirement income in some way.