Does Your Retirement Plan Cover You for Life?

Does Your Retirement Plan Cover You for Life?

According to reports, nearly half of Americans are afraid of running out of money in their retirement – and that fear is the single biggest retirement concern they have. What’s the key to setting those fears at rest? Planning for both longevity and inflation.

Let’s look at the two in turn.

Longevity: How Many Years of Retirement Should You Plan For?

Average life expectancy has grown markedly in the past 70-plus years. In 1950, for example, the average life expectancy was just over 68 years. That’s one of the reasons Social Security benefits began at 65. People were not expected to be in retirement for an extended period of time. But the average life expectancy for someone born in 2014 is expected to be nearly 79 years, more than a decade longer that someone born in the mid-20th century.

Not only that, but those figures are an average, and many people are living significantly longer. At Montgomery Taylor Wealth Management in Santa Rosa, CA, we expect clients to live well into their 90s.

What this means is, if you plan to retire at age 65, a sensible plan includes a retirement span of at least to 20 to 30 years. If you retire early, it can be reasonably 40 years or more!

When deciding how many years you need to plan for, multiple factors come into play. Think about your family’s longevity. Think about your personal health. Then plan financially to ensure that your retirement nest egg will cover you for life.

Pre-retirees should take the following steps:

First, estimate your income in retirement. Add up all your anticipated guaranteed income sources, including Social Security benefits and any pensions.

Second, estimate your budget in retirement. Factor in any changes caused by or likely in retirement. For example, if you are currently paying a mortgage, are you likely to still be paying it in retirement? At what point will your mortgage payments end?

A general rule of thumb is that spending needs in retirement are roughly 80 percent of spending needs prior to retirement, but that is highly variable. If you plan to travel extensively or relocate to an area with a higher cost of living, your expenses could actually go up. In addition, wherever you live, costs will rise due to inflation, so be sure to account for the cumulative effect of inflation on your purchasing power.

Third, estimate how much you can withdraw from your retirement savings, such as 401(k)s or IRAs, without running out of money over the 20 to 30 years (or longer) that you expect your retirement to span.

A quick search online will tell you that 4 percent is the right amount. While 4 percent is a popular rule of thumb, this is also highly variable. If you expect to live longer than 30 years in retirement, or your portfolio allocation varies, the 4 percent figure would need to be adjusted. (Blindly following general rules of thumb can be extremely dangerous, especially for high net worth individuals. Before making assumptions about your retirement, read our recent blog post: Why Pay for an Advisor When You Can Find Free Advice Online?)

Fourth, check that your estimated expenses and income sources align comfortably. Make sure you have enough disposable income left over to cushion yourself against financial shocks, such as emergency medical bills. Add your defined income sources, such as Social Security benefits, to your estimated annual withdrawal from your retirement funds. Is this amount sufficient to cover your anticipated expenses with a cushion?

If not, work with a financial advisor to strategize methods of reducing expenses, such as downsizing, selling your home or working in retirement.


It’s never too early to start planning for the future. Contact Montgomery Taylor Wealth Management and get the conversation started.


Inflation: Don’t Ignore the Steady Erosion of Your Purchasing Power

realistic financial planning guideDon’t think you’ve fully done your planning for the length of your life until you’ve planned for the steady toll that inflation inflicts on your finances in retirement.

Inflation is the steady increase in the cost of goods and services, and generally runs at between 1 and 3 percent per year. In fact, the U.S. Federal Reserve aims to keep inflation at 2 percent annually, and takes action if it rises much above that.

Those percentages may seem low enough, and therefore, can be easy to ignore. But a 2 percent inflation rate over a 30-year retirement means that everything you need or want could cost more than 60 percent more at the end of your retirement than it did at the beginning – and if inflation rises to 3 percent a year, your costs would be even higher.

The effect of inflation is exacerbated in retirement for several reasons. First, retirees are very often on a fixed income. Second, the inflation in certain sectors is much higher than the general inflation rate – and many of these sectors are particularly important to, and heavily used by, retirees.

Take healthcare, for example. Between 2000 and 2018, healthcare costs increased astronomically. The cost of prescription drugs alone climbed 188 percent, and average out-of-pocket healthcare costs for folks over 65 increased 117 percent.

While Social Security benefits are subject to periodic cost-of-living increases, they have not kept pace with inflation.

The long and short of the inflation story is that you are likely to need double the income over the span of your retirement to purchase the same amount.

While this sounds daunting, the key is a plan. Talk to a financial advisor about your asset allocation, so that your portfolio returns outpace inflation. When planning your retirement savings, make sure that your final savings target includes the cumulative effect of inflation.

Both advancing longevity and rising inflation will impact your retirement planning.

How Montgomery Taylor Wealth Management Can Help

Retirement planning looks different for everyone. Making sure you don’t outlive your money is a dangerous task to take on yourself if you don’t have the time, experience and knowledge to factor in important elements like inflation.

Also, while the general principals may be the same, wealth management in Santa Rosa looks different than wealth management in a different state, or even in a different area of California. Cost of living can be high in Sonoma County, which inflation will make even higher.

If you’re looking for wealth management services in Santa Rosa, CA, contact us. Our team has the experience to discuss these important factors with you, explain your options and make sure your retirement savings will last throughout your life.

Montgomery Taylor Realistic Financial Planning