Getting your retirement ducks in a row

greenstockcreative/stock.adobe.comRetirement-the practice of leaving one's job and ceasing to work elsewhere-has been around since the 18th century, when life expectancy hovered between ages 30 and 40. But that number has doubled since the early 1800s. Today, life expectancy in most industrialized countries is more than 75 years.

The good news is that we will live longer. The bad news is that because we live longer, we're more vulnerable to age-related diseases such as coronary artery disease, certain cancers, diabetes and dementia.

In the past, people worked until they died or were physically unable. Today's retirement age, approximately 65, was adopted during the late 19th and early 20th centuries. Work no longer defined one's existence. Instead, work became a means to an end characterized by achievement, fulfilment and accomplishment. Today, retirement is the ultimate goal for many of us as we look forward to recreation, travel and rediscovery.

How long do you need to plan for?

Males born this year can anticipate a life expectancy of 76 years; women can expect to live to age 81. When I was born in 1948, the anticipated life expectancy in the U.S. was 64.6 years and the Social Security/retirement age was 65. Not surprisingly, the length of time spent in retirement was quite limited for those born in that era.  

Today, a life span of 90 years or longer is a reality for many. This longer life span requires a good deal of financial planning and flexibility. How will we spend a retirement that may last 35 years? How much money will it take to sustain us?

Our grandparents and parents anticipated that Social Security would support their retirement, but that won't work in our era. The average Social Security benefit is $1,422 monthly, which equates to $17,532 annually. The maximum benefit for high-dollar contributors is $3,770 monthly. That is the range of payment a retired veterinarian can anticipate. Could you live and support your lifestyle on $3,770 per month? Remember, medical expenses, quality-of-life costs and taxes are not included. Long-term care is expensive, and long-term care insurance is not full care.

Could you (financially) survive retirement?

As we plan for retirement, there are many variables to consider, including our health and longevity, the size and quality of our investments and the return on those investments, living expenses and lifestyle. Simply put, how much money do you have? How is it invested? How will you spend your money, and how long will you live? Can you start planning now?

Fifteen years ago, I met a university economics professor in an airport lounge. At the time the concept of “FIRE” was popular: Financial Independence, Retire Early. The professor explained that early retirement would necessitate a bankroll in the neighborhood of $5 million-a pretty expensive neighborhood. Most FIRE planners look to pretty simple retirements (small homes, rustic travel, restricted spending, part-time work and lower expectations). Only time will tell if FIRE is a viable option for retirement.

How can you estimate your likelihood of retirement success? To start, how much do you currently spend? Let's say you anticipate spending $100,000 a year. Most planning experts advise having 25 times your annual spending in your retirement funds. That means you would need $2.5 million to support your desired lifestyle. I know $100,000 sounds like a big number, but just having a lot of money doesn't mean it will be enough.

How much are you spending now and how will that change? What expenses come out of your paycheck that you'll have to pay out-of-pocket once you retire-like health insurance? What extra expenses-like travel-do you want to budget for during retirement? A recent study that analyzed the gap between spending and income found that the median spending-to-income ratio among single, retired individuals was a whopping 112%.

The 4% rule of thumb

There's a rule of thumb that says you can withdraw 4% of your portfolio value each year in retirement without incurring a substantial risk of running out of money. Using this rule, for every $100,000 you have, you'd withdraw $4,000 a year. That does not consider unanticipated expenses like major dental expenses, uninsured medical expenses, unexpected declines in investments, taxes or significant declines in home value. In addition to your 4% draw, consider an emergency fund for unexpected expenses. It's often recommended that you save three to six months' salary and don't touch it except in an emergency. That would go for retirement too.

So, are we going to reach these goals?

Americans tend to earn the most money from their late 30s to their early 60s, making this a crucial period for socking away extra income. Yet only 36% of Gen Xers (ages 39 to 54 this year) are saving in some kind of retirement account. "I don't earn enough money to save for retirement" is often cited as a major reason for not participating in a retirement plan. And many of those who do participate aren't saving enough.

Obviously, there are two ways to save. Pretty much anyone in personal finance agrees that the best way to get ahead financially is to increase the difference between what you earn and what you spend.

Spend less. Stop spending money right now and that money will sit in your bank account building up your net worth. But, of course, there's a limit to how much you can cut your spending.

Earn more. Earning more income has a huge advantage-it theoretically has no cap. You can always earn more by working more, right? Or you can consider “windfall revenue”-like inheritances, tax refunds, settlements and bonuses-as growth savings rather than free fun money. You can always increase your income with second jobs, enough effort, enough good choices and enough luck.

The overall goal is to help you build and spend your savings for a successful retirement.

Regardless of how much you save-from $5 to $5,000 a month-it's crucial to begin saving toward retirement as soon as possible and to maximize contributions to tax-deferred accounts. It's never too early-or too late-to start.

Dr. Paul is the former executive director of the Companion Animal Parasite Council and a former president of the American Animal Hospital Association. He is currently the principal of MAGPIE Veterinary Consulting. He is retired from practice and lives in Anguilla, British West Indies.