does. Behold the dirty little secret of
retirement planning.
So if you can’t answer these ques-
tions and you can’t plan without them,
what can you do? First, relax—you have
options. You can buy insurance against
uncertainty. You can build a margin
of safety into your assumptions. Most
important, you can let go of the no-
tion that there is a single, permanent
right answer and accept the need to be
flexible. Perfection is the wrong goal.
“You know that you’re guessing—and
you know you’re going to be wrong,”
says Ralph Warner, author of Get a
Life: You Don’t Need a Million to Retire
Well. “The question becomes, ‘Which
way would you rather be wrong?’ Do
you want to sacrifice to save a lot now,
on the off chance you’ll live to be 106?
Or do you want to enjoy more now and
take your chances later?”
With that puzzle in mind, let’s
tackle the three questions.
How long
will you live?
Your life span is the number-one wild
card of retirement planning, says
Laura Carstensen, Ph.D., director of
Stanford University’s Center on Lon-
gevity. “You could plan your money
really well if you knew exactly when
you were going to die,” she says. “Un-
fortunately, it doesn’t work that way.
None of us has a guarantee.”
You can, though, buy another kind
of guarantee—an assurance that, how-
ever long you live, your money will not
run out. It’s sold by life insurance com-
panies, and it’s called an immediate
annuity. Annuities have gotten a bad
name, largely because of the abusive
sales of “deferred” annuities, a kind of
fee-heavy investment. But immediate
annuities are a different animal. In
simple terms, you give the insurance
company a lump sum; in return, it
promises to pay you a set stipend ev-
ery month for the rest of your life, no
matter how long you live. At current
rates, for example, a $250,000 annuity
would buy a 70-year-old man a yearly
income of $20,400. If he dies shortly
1
Planners who once advised saving 10 percent
of your salary now recommend 15 percent.
It’s all about the margin of safety.
after that, the insurance company
keeps the money. If he keeps on going,
his monthly income keeps going, too.
There are drawbacks. Money that
you tie up in an annuity will be money
that can’t go to your heirs. Unlike
Social Security, few annuities increase
their monthly payout to keep pace
with inflation. And once you’ve paid
the insurer, you can’t get the money
back to handle a medical emergency,
say, or start a new business.
So don’t annuitize your entire retirement stash. Many planners recommend putting between one-fourth and
one-half of your money in annuities.
Mike Piper, author of Can I Retire?,
says to buy just enough annuity income to cover fixed monthly expenses
such as mortgage and utilities. Either
way, the payoff is peace of mind.
How much
will you
earn on your
investments?
It used to be that any college freshman
who hadn’t dozed through Economics
2
101 could tell you what investments
will earn in the long run. Drawing on
85 years of market data compiled by
the Chicago research firm Ibbotson
Associates, everyone assumed U.S.
stocks would earn about 10 percent
a year on average; bonds, around 5. 5
percent; and a half-stock and half-bond portfolio, around 8 percent.
Then came the “lost decade” of
2000 to 2009, when stock-market
indexes went nowhere. How big a difference did that make? (Are you sure
you want to know?) Suppose you had
saved $500,000 by age 60. If all went
according to Ibbotson, you’d have a
bit more than $1 million in the bank by
age 70. At today’s annuity rates, that
would buy you an annual income of
$87,000 for the rest of your life. Not
bad. But if you’d had the misfortune
of turning 60 in 2000—the dawn of
the lost decade—you’d have reached
retirement 10 years later with barely
the same $500,000 you started with.
Your annual annuity income from that
sum today: just $39,000. Relying on
Ibbotson averages for a retirement plan
could be like following one of those
medieval “Here Be Dragons” maps.
