Observations from JP Morgan’s 2023 Guide to Retirement
Planning for retirement is a complex task involving many decisions about an unknown future. Working with a qualified, comprehensive advisor who looks at your entire financial picture and has your best interests in mind can help you navigate and prepare for a fulfilling retirement. As a practitioner in financial planning, I am constantly reviewing financial research to ensure my plans reflect not only my client’s unique financial circumstances but also the future economic, tax, and demographic changes.
JP Morgan releases an annual Guide to Retirement that summarizes several eye-opening observations regarding retirement longevity, income, healthcare, and expenses. The guide is based on several different studies performed by JP Morgan and in the personal finance industry.
The referenced slides can be found at the end of the article.
Observation #1 - You'll Probably Live Longer than You Think
Slide 4 of the Guide (Page 2 of the PDF)
How long are you going live? If you could answer that question precisely, my job would be much, much easier. Longevity is one of the significant risks that need to be addressed when developing a solid retirement plan. Planning for an unknown time horizon involves risk management, opportunity analysis, and a firm grasp of your goals.
When people think about how long they are going to live, they often think about when how long their parents or grandparents lived. While that plays a factor, it is important to recognize that longevity is increasing due to better access to food, healthcare, and care options for aging. And guess what… that’s likely not going to change in the future. Advances in medical technology, medicines, and assistive technologies like self-driving cars or personal mobility devices will likely continue to push the curve.
From JP Morgan’s report, if you have reached age 65…
- 57% of women should expect to reach age 85.
- 45% of men should expect to reach age 85.
- 13% of good-health women should expect to reach age 100!
- 8% of good-health men should expect to reach age 100!
Life expectancy probability increases by age if in good health...
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Observation #2 - You May Retire Earlier than You Expect
Slide 8 of the Guide (Page 3 of the PDF)
When you retire is not entirely up to you and may happen sooner than you expect. 69% of workers plan to work to age 65 or longer, but only 34% actually do. Unfortunately, some of the biggest reasons for retiring early are related to health problems or uncontrollable employment loss.
If you have been planning to draw on your savings at age 65, but then start at age 62, that results in a significant shift in the retirement lifestyle your savings can support. Not only do you have three fewer years of savings, at likely your highest lifetime earnings, but you also have to support three more years of spending!
Additionally, this may impact your social security benefit amount, especially if you claim early to fill the unexpected income gap.
Observation #3 - When You Claim Social Security has a Big Impact on Benefits
Slide 14 of the Guide (Page 4 of the PDF)
The decision to take social security benefits early depends on your unique financial situation, and there is no one right answer that applies to everyone. When making the decision, you need to consider a number of factors. These include whether or not you intend to keep working, the impact of claiming early on survivor benefits, your estimated longevity, the effect of reduced guaranteed income for life, whether family benefits will be available, and how it might impact other strategies such as Roth Conversions.
If you claim at age 62, your cumulative benefits at age 81 will be approximately $80,000 less than delaying to your Full Retirement Age, or Age 70. At age 90, that widens to over $500,000 compared to claiming at age 70 and $300,000 compared to claiming at Full Retirement Age. It does not mean that claiming early is a bad decision. It is simply a piece of the puzzle that needs to be considered.
Observation #4 - The Higher Your Income, The More You Need to Save
Slide 18 of the Guide (Page 5 of the PDF)
Rules of Thumb can be helpful guides, but savings rate is often an area where it falls short. More specifically, as your income increases, so should your savings! This is because Social Security replaces less of your income, which means you need a bigger nest egg to fill in the income gap in retirement.
Due to Social Security benefits being weighted to benefit lower-income people, those with the highest income must save accordingly. At $30,000 of income, Social Security will replace ~73% of their pre-retirement income. However, at $300,000 of income, Social Security will replace just 16%.
Observation #5 - Inflation Affects Expenses in Different Ways
Slide 31 of the Guide (Page 6 of the PDF)
Inflation is the general rise in the cost of goods and services over time. Except for the recent inflation due to the COVID fallout, inflation has been relatively tame. However, looking at the different inflation levels for the high-level categories, you’ll notice that Health Care has a higher long-term average inflation rate and greater importance in those budgets for ages 75+.
Observation #6 - Retirement Expenses Decrease Differently for Different Financial Situations
Slides 27 to 30 of the Guide (Pages 7 to 10 of the PDF)
While inflation increases spending over time, lifestyle changes due to aging have the most significant impact on retirement spending. As you age, you spend less across various categories such as food, travel, and transportation.
However, the reduction in spending is different based on your financial situation. Those with investable assets of $250k to $750k reduced their expenses at age 60-64 to age 95+ by 32%, whereas those with $1M to $3M in investable assets decreased by 20%
