You Might Live to 100 or More. But Can You Afford To?

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Take steps to reduce your financial stress in your golden years. 

According to the World Economic Forum, there are more centenarians in the U.S. than anywhere else in the world. Indeed, the combination of better healthcare, nutrition, and other factors mean more people are living to 100 than ever before. The UN also predicts that by 2025, over a quarter of the population in the U.S. and Europe will be over 65. On the flip side of the coin, the Centers for Disease Control and Prevention says COVID-19 caused the life expectancy of the average American to fall slightly.

Those mixed figures actually highlight one of the challenges of saving for retirement. Few of us know how long we will live for. That can lead to an understandable temptation to live in the now rather than put money aside for the future. Particularly when sky-high living costs are putting so much pressure on everybody’s bank accounts.

The trouble with this thinking is that you really could live to be 90 or 100. If you don’t have enough put aside — or are in debt when you retire — you may have to work a lot longer than you’d planned. You might also wind up leaning heavily on your children or have to move out of your home. Unfortunately, according to a study from AARP, only around 40% of people in their 30s and 40s feel prepared for retirement.

Start now to reduce stress in your old age

The earlier you start to save and invest for your old age, the less financial stress you’ll have in your autumn years. Time matters because it allows your assets to earn compound interest — basically interest on your interest.

To give you an example, if you invest $2,000 when you are 25 or 35, it will have longer to work for you than if you invest the same amount when you’re 45 or 55. It’s kind of like a snowball gathering momentum and size as it rolls down the slope (in a positive way).

There are no guarantees when it comes to investing in the stock market, but for the purposes of illustration, let’s work with a conservative annual return of 9% a year. This is below the average S&P returns for the past 20 years. Assuming you don’t touch that $2,000 at all, here’s how it might compound across the decades:

How much do you need in your retirement fund?

There are a few different ways you might estimate the amount you need in your old age, but a lot comes down to your cost of living. Start by thinking about what your retirement will look like. If you’re planning to spend it on a cruise ship playing bridge and sipping cocktails, your costs will be very different from someone who wants to live in the countryside and write a novel.

A common back-of-the envelope calculation is to use the 4% rule. The thinking here is that your retirement fund would need to be big enough for you to live off 4% of your portfolio in your first year of retirement. In theory, you’d then be able to withdraw a similar amount (adjusted for inflation) each year for another 30 years. It’s a very rough milestick, but it means if you had $1 million by the time you retire, you’d be able to take $40,000 the first year. For a more detailed reckoning, check out our retirement calculator.

Preparing to live to 100

If you’re not sure you can afford to live to 100 or more on your current retirement savings, the most important thing you can do is look for ways to save and invest more. This may mean cutting back on your spending or trying to increase your earnings so you have more cash to put toward your old age. Here are some steps to take:

Make a plan: There are a lot of factors that will make a difference to how you live your retirement, including where you want to live, what you want to do, and how long you might want to work. Try to map out best- and wors- case scenarios, particularly in terms of your health and healthcare costs.Make regular contributions: We already touched on the importance of starting early, but another key part of retirement planning is to contribute something — even a small amount — to your retirement every month. If you get into the habit of putting that money aside, it becomes easier to build up what you need over time.If your company has a 401(k), contribute to it: 401(k)s are tax advantaged, employee-sponsored retirement schemes. Some companies match all or part of your contributions to the fund — meaning if your firm has one and you’re not putting money into it, you could be leaving money on the table. Find out what provisions your employer has in place and how you can benefit most from them.Make the most of tax-advantaged contributions: Company plans are not the only tax-advantaged retirement options. It’s also worth looking into an individual retirement account (IRA) or a Roth IRA. Make the most of any tax breaks — this will ultimately mean more money for your old age.

None of us know whether we’ll make it to 100. But taking even small steps could make a big difference. Whatever age you live to, that cash could improve your quality of life and help you enjoy your golden years.

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