Many people are living longer, and a good portion of young Americans expect to live to see triple digits in age. A new Northwestern Mutual study found that 40% of millennials and Gen Zers expect to live to be 100.
The study also found that these younger generations plan to retire earlier than the traditional retirement age of 65 — Gen Z plans to retire at 60, which means many will need to be able to fund 40 years of retirement, while millennials plan to retire at 63, which means many will need to be able to fund 37 years of retirement.
How To Plan for a 40-Year Retirement
Retirement planning is essential for anyone, but if you’re looking to fund four decades worth of retirement, you need to be even more scrupulous.
“It starts with a comprehensive financial plan, and what I mean by a comprehensive financial plan is a plan that includes permanent life insurance, investments, annuities and long-term care planning,” said Aditi Javeri Gokhale, chief strategy officer, head of institutional investments and president of retail investments at Northwestern Mutual.
“On the investment side of it, you want to build an investment portfolio that’s diversified,” she said. “You want to think about, not only your immediate hopes, goals and dreams, but about retirement goals too.”
Javeri Gokhale also considers permanent life insurance to be an essential part of a comprehensive retirement plan.
“How it works is it generates value over time,” she said. “The sooner you start, the sooner you generate. So you can use that as an investment vehicle during downtimes.”
Having a source of guaranteed income in retirement, such as an annuity, is also essential.
“If you have guaranteed income, irrespective of market volatility, that’s another source of finances that you are setting yourself up with,” Javeri Gokhale said.
Finally, you need to have a plan for paying for long-term care and health expenses in retirement, she said.
“As we think about comprehensive financial planning, these components are extremely important,” Javeri Gokhale said. “And the sooner you start, the better it is for you to be able to have that post-retirement 40 years.”
The Role of Risk in Retirement Planning
The longer your retirement, the more you will be exposed to potential risks. That’s why Javeri Gokhale said that planning for different types of risk in retirement is another component of planning for a 40-year post-work life.
“A good financial plan will help you to protect and prosper,” she said. “The ‘prosper’ is the wealth creation — having a balanced portfolio and diversified portfolio. But the part that people don’t talk about much is the ‘protect’ — how are you going to protect your wealth from the uncertainties of life?”
Javeri Gokhale said the ideal plan accounts for six different kinds of risk.
“There is (1) longevity risk, which is the risk of outliving your retirement savings,” she said. “Then there’s the (2) market volatility risk, which is, you need to be protected so that you’re not in a position that you have to sell investments when they’re at an all-time low. Then of course there’s (3) inflation risk and (4) tax risk — do you invest in a 401(k) or do you invest in a Roth IRA? There are different tax implications based on your predictions about whether your taxes will go lower or higher in the future.
“Then there’s (5) healthcare costs and long-term care planning risks. After retirement, you need to make sure if you need long-term care, you’re not depending on your kids and can live gracefully. And the last one is (6) legacy risk — ‘I’ve lived a full life, but I want to pass something to the next generation, so is my nest egg protected?’”
How Much Do You Need To Save for a 40-Year Retirement?
The study found that people in their 20s, 30s and 40s believe they will need between $1.2 million and $1.44 million to fund their retirement, while high-net-worth individuals (of all ages) believe they will need of average of $3 million. While it depends on the individual, Javeri Gokhale said that how much you actually need will likely fall into this range.
“It really depends on your lifestyle,” she said. “There are some people that are disciplined consumers and there are some that live an extravagant lifestyle, so to say that you can live for $1 million or $2 million, it’s really a function of your lifestyle and how you want to adjust it to be more conservative or more extravagant. But what you’re generally seeing across different customer segments and different generations, it ranges from $1.25 million to $3 million.”