Running out of funds during retirement is a significant concern. Recent changes in retirement laws provide fresh perspectives on your savings.

Last week brought noteworthy news amidst the pandemic's challenges. For the first time in four years, a CDC report revealed that life expectancy in the U.S. is increasing.

The average life expectancy now stands at 78.7 years across the U.S. population. Men's average is 76.2 years, while women can expect to live around 81.2 years—nearly five years longer.

Should we celebrate? That largely depends on two factors: your grasp of life expectancy and your current retirement readiness. Let’s break them down.

Understanding “Average Life Expectancy”

The CDC describes life expectancy as “the expected average number of remaining years of life at a specific age.” It's vital to note that when we state the average life expectancy for women is 81.2 years, it indicates that half of women surpass this age.

Another crucial point is that the longer you live, the more years you can expect to live. For example, if you reach age 65, your average life expectancy extends to 19.5 additional years, bringing you to about 84.5 years. Women who reach 65 typically enjoy 20.7 more years (average age 85.7), compared to men at 18.1 additional years (average age 83.1).

Your longevity is influenced by lifestyle choices (like smoking or using seatbelts) and genetics. It’s wise to plan for a lifespan extending to 95 or even 100 years by saving and investing accordingly.

A New Planning Tool

The SECURE Act has introduced several significant updates to retirement planning. Notably, it enables an annual estimate of what your retirement savings could yield if converted into an annuity for income.

It’s essential to know that various strategies exist for withdrawing funds from your retirement account:

  • Adhere to the 4% rule, which suggests withdrawing no more than 4% of your balance annually to sustain 30 years of retirement. Some experts recommend a slightly lower withdrawal rate.
  • Convert part of your savings into an annuity for a steady income stream. This, combined with Social Security and any pension, can help cover your fixed expenses while allowing the remainder to grow with inflation.

However, unless you’ve analyzed your portfolio for potential income, you may not know if your savings will adequately support your envisioned lifestyle. A February 2020 survey highlighted that many people neglect this crucial analysis.

Confronting Financial Uncertainty

The survey found nearly 60% of pre-retirees (aged 55 and older) feel overwhelmed by estimating their spending in retirement. Alarmingly, 72% worry about outliving their savings, 64% are stressed about maintaining their lifestyle, and 60% fear a lack of income.

What can you do? Here are three steps.

1. Estimate your retirement expenses.

Compare it to your current spending. Will your mortgage be settled? Are you moving to a less costly area? Consider which expenses currently covered by your employer (like healthcare) will become your responsibility. If this feels too complex, assume you’ll need about 85% of your current budget.

2. Determine your expected monthly income.

Visit socialsecurity.gov for an estimate of your potential benefits. Until retirement income figures appear in your statements, utilize a retirement calculator to predict your savings growth. You can also check this calculator to assess whether your retirement income will cover your living costs.

3. Make adjustments if necessary.

This often means increasing your savings rate, targeting around 15% of your income annually (including employer contributions). If you’re starting late, consider aiming higher. According to Fidelity’s retirement benchmarks, aim to save one time your income by 30, three times by 40, six times by 50, eight times by 60, and ten times by retirement. Achieving these goals will help replace approximately 85% of your pre-retirement income for the following 30 years.