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Analyzing the Rising Cost of Retirement

Retirement is more expensive today than it’s ever been

David Blanchett, Morningstar Investment Management LLC


Achieving retirement goals is a combination of a skill and luck—typically more skill than luck, but it’s worth noting what’s outside your control as financial advisors. 

The skill part includes saving for retirement, which is often the single largest determinant of an investor reaching his or her retirement goals. The luck part includes portfolio returns and, to some extent, how long a person expects to live.

Sure, it’s possible to do things to control the risk of a portfolio. For example, advisors could recommend that their clients invest more of their portfolio in traditionally safer assets like bonds or cash. But the returns are really beyond the control of the investor, the advisor, or asset managers.

Mortality is slightly different. No one wants to die early in retirement. But the longer retirement lasts, the more expensive it can become.

Estimating the cost of retirement

All of this is important in the context of how expensive retirement is today, relatively speaking. We can look back historically at interest rates—which are an excellent proxy for bond returns—and mortality tables to determine how expensive it has been to fund retirement by estimating the cost of buying an annuity that would pay a fixed, inflation-adjusted benefit for life. For a research paper I worked on with professors Michael Finke and Wade Pfau of The American College of Financial Services, we ran some numbers to estimate the cost of funding $1 of retirement income, adjusted annually for inflation, each year since 1982. We used historical mortality tables from the Social Security Administration, historical Treasury yields from the Federal Reserve, and historical implied inflation estimates from Cleveland Federal Reserve. You can see cost estimates for a 65-year-old man and woman in figure below.

 Source: Morningstar and author's calculations, June 2017

While the true historical annuity payouts offered by annuity companies differed slightly from these estimates, this approach closely estimates the historical payouts for nominal annuities based on data from

To provide some context about the values in the figure, a 65-year-old man retiring in 1982 would pay about $10 for each $1 of guaranteed lifetime income. So, if this individual wanted $25,000 a year of guaranteed income it would cost approximately $250,000. Note: The same amount of income costs slightly more for women, because they tend to live longer than men.

Increasing life expectancies, rising cost of retirement

The graph above shows that the cost of retirement income has approximately doubled in the past 34 years. That means the cost of funding retirement has more than doubled over that time and is more expensive today than it’s ever been in the past. The increase in cost has been driven mostly by the decline in interest rates, but also by increases in life expectancies. While increasing interest rates may reduce the cost of retirement for future retirees, life expectancies will likely continue increasing.

What does the rising cost of retirement mean for most workers? Primarily, it means they either need to consider the following: saving more for retirement; spending less during retirement; working longer; or some combination of these. U.S. workers have historically benefited from strong market returns, which reduced required savings levels. But workers today may not be so lucky.

Short on savings? Consider delaying retirement

Saving more for retirement isn’t a viable option for many Americans, though, and the impact of higher savings is muted for workers who are closer to retirement. My advice to these folks is to consider delaying retirement as long as possible. For many workers, this won’t be an option because of issues such as their health or layoffs. But for those who can keep working, a delayed retirement could potentially improve retirement. Plus, job options at age 62 will most likely be better than job options at 82. Delaying retirement results in more time to save for retirement, more time for portfolios to potentially grow, a shorter retirement period to fund, and an increased Social Security benefit—all things that can significantly improve your clients’ chances of reaching their retirement goals.

But being aware of the cost of retirement can help your clients make better decisions about how they spend their money. I suggest saving more for retirement and planning to work longer. And while planning for retirement, help your client focus on what can be controlled and be conservative about the assumptions of what can’t be controlled. That path may help provide the best chance for them to reach their retirement goals.

Please see below for important disclosure. 

Read the full research paper "Required Retirement Savings Rates Today."

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Important Disclosure

This commentary contains certain forward-looking statements. We use words such as “expects”, “anticipates”, “believes”, “estimates”, “forecasts”, and similar expressions to identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results to differ materially and/or substantially from any future results, performance or achievements expressed or implied by those projected in the forward-looking statements for any reason.  Past performance does not guarantee future results.

Morningstar Investment Management LLC is a registered investment adviser and subsidiary of Morningstar, Inc. The Morningstar name and logo are registered marks of Morningstar, Inc. Opinions expressed are as of the date indicated; such opinions are subject to change without notice. Morningstar Investment Management and its affiliates shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, the information, data, analyses or opinions or their use. This commentary is for informational purposes only. The information data, analyses, and opinions presented herein do not constitute investment advice, are provided solely for informational purposes and therefore are not an offer to buy or sell a security. Before making any investment decision, please consider consulting a financial or tax professional regarding your unique situation. ​

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