Most people budget not for true emergencies — which are, thankfully, rare — but for what we might call predictable surprises. For example, there is no such thing as emergency vehicle or home repair. All cars and homes will require repairs and maintenance, even if you don't know when. For true car or home emergencies, there's insurance.
Saving for retirement in America is so difficult in part because the surprises are so unpredictable — not to mention unpleasant: inflation, outliving your money, going to a nursing home. And our insurance — Social Security — is inadequate.
The impossible task of retirement planning reminds me of a New Yorker cartoon I cut out and saved for so long it's turned yellow: One member of a couple looks up triumphantly from a kitchen table covered in papers and says, "If we take a late retirement and an early death, we'll just squeak by."
Social Security ought to be a nearly perfect way to manage retirement uncertainty: Social Security pays a benefit no matter how long you live and is adjusted for inflation. But it's too small to live on, so we must have other sources of income.
Running Out of Money
Only a few Americans who are very rich or who live on traditional defined-benefit pensions don't fear running out of money. My mother, for example, lived on less than $25,000 per year. She was so worried about money she avoided visiting her friends. When she died suddenly at age 84, she had plenty left. Seeing all the money she saved for emergencies made me sad.
But of course, none of us know when our time will be up. Retirement planning requires playing the longevity guessing game. Compared with actuarial life tables, men tend to overestimate, and women underestimate, their life expectancy.
To more accurately predict the unknowable, you can look at U.S. Vital Statistics: In 2019, a 65-year-old white woman could expect to live an additional 21 years; her Black male counterpart another 17 years. Life expectancy calculations by socioeconomic class are more complicated, but the Brookings Institution provides one of the best.
According to them, women born in 1940 in the top 10% of household earnings who lived to age 50 were expected to live another 28.5 years. Women in the bottom 10% who lived to age 50 were expected to live only another 22.2 years. Rich people have more of everything, including life span.
All this uncertainty makes planning for retirement harder. Consider: Someone making average earnings, about $70,000 per year, at 65, needs $750,000 to supplement Social Security to maintain living standards for 25 years. Assuming a life expectancy of 85, not 90, reduces the number to $650,000. That's a big difference!
