Recently, in describing situations before today, for instance back when my father would have retired if he had lived that long or even just 20 or 30 years ago, I have begun to fall back on an expression from nursery rhymes “once upon a time.”
The expression is useful because it is sometimes difficult to explain to someone who did not experience a prior time just how different today is from the past and how much some changes that are outside our control affect our decision making today. So I say “once upon a time” and then apply it to several decisions including the question whether average Americans are financially prepared to handle retirement.
One factor involved in the change is the difference between a pension, otherwise referred to as a defined benefit plan, and what we have today. Once upon a time, average Americans often knew on retirement, they could call upon a pension from their employer. In fact, planners referred to pensions as one of the “legs” of a “three-legged stool” to support average Americans through retirement. The other two were personal savings and Social Security. The pension would guarantee a given monthly income sometimes increased annually or by some other measure but, in any event, not subject to the twists and turns of the market.
Employers assumed the risk that their companies would continue to grow and prosper and employees implicitly assumed they would have at minimum that pension income plus likely Social Security benefits. Savings were assumed but there was not the reliance on individual savings that we live with today. Except for some often government employees, pensions seem to be a model from the past.
Today, with defined contribution plans, Americans generally rely on the market and the anticipated market of the future in addition to assumptions regarding inflation in making retirement decisions. The world in which we live is much more uncertain both as to rising investment possibilities and future expectations. For various reasons including overseas competition and rapid turnover of companies, many employers today do not assume the risk of assuring a level retirement and, as a result, responsibility is very often turned over to employees and to their investment advisors.
Retirement calculators have assumed a more significant role as a result of these changes. This means we are no longer living in “once upon a time.” Certain assumptions are made and, based on those assumptions, planners arrive at recommendations. The individual employee may choose although those choices can change over time. He or she might retire and then decide to return to work as many of my friends have done. Health can deteriorate which can substantially affect the results of calculations. We are more uncertain.
Because there are multiple possibilities, often what is referred to as a Monte Carlo calculator or simulation is used. The simulation includes expectations regarding age at retirement, life expectancy, inflation, investment return, portfolio size, and expected retirement expenses and arrives at best case possibilities and worst case.
Some calculators will require more information depending on their sophistication. Others will work with less information because they assume answers to some of these inputs. The point is the math. They’re all calculating the same thing in roughly the same way using roughly the same input. If you have worked with a financial planner, there is a good chance your planner used Monte Carlo simulations that may be a good starting point but probably not the ending point.
One point I would make is that health and living arrangements which are critical to decision-making regarding the viability of a portfolio are too often disregarded. These seem almost always either left out or given short shrift in standard software programs. Some do not even include medical expense or health insurance premiums in the options. If you live to age 100 but are healthy until age 99 your plan is going to be very different than if you experienced multiple health emergencies beginning at age 70. If you continue your retirement at home and never travel, the result will be very different than if you move to a continuing care retirement community and make worldwide travel a priority.
Plans change. They cannot be placed on a shelf. Financial assumptions need to be updated. These are some of the issues we consider when advising seniors regarding their financial plan and not just estate documents. It makes a difference.
Janet Colliton, Esq. is a Certified Elder Law Attorney. Her practice, Colliton Elder Law Associates PC is limited to elder law, retirement planning, life care, special needs, guardianship, and estate planning and administration, with offices at 790 East Market St., Ste. 250, West Chester, 610-436-6674, [email protected] She is a member of the National Academy of Elder Law Attorneys and, with Jeffrey Jones, CSA, co-founder of Life Transition Services LLC, a service for families with long term care needs.