Are you a runner? Into yoga? Soul Cycle, right?
We women today are healthier than we have ever been. We know what to eat and what to avoid…and we mostly manage to do it. (Thank goodness dark chocolate, red wine and coffee are now viewed as somewhat “healthy.”)
And it goes beyond nutrition and fitness: a healthy lifestyle is, for many of us, an important part of our self-image. This is particularly true among younger women.
So we’re taking actions to help us live longer, and at the same time, advances in medicine are also helping us extend our lives. You are less likely now to die of cancer than your parents and grandparents were, for example.
As a result, girls born in 2011 are expected to live to the age of 81. That’s a full 10 years more than our mothers’ generation.
But here’s an important thought: if you’re taking action to live a longer life, but you’re not getting yourself financially prepared for a longer life, you’re only getting half the job done. After all, do you see yourself as one of those cool grandmas scooting around town on a Vespa or well…not?
This means investing.
I know, I can hear you: Isn’t investing risky?
Well, I would argue that it’s riskier not to invest. If you’re working hard and start saving 20% of your salary at the age of 30—and you keep that money in cash— Ellevest estimates that you have only a 3% chance of maintaining your lifestyle in retirement. And if you save 10% of your salary, it’s just not going to happen for you.
If, instead, you invest that same 20% of your annual salary into a diversified investment portfolio, we estimate that you have a very high probability of retiring well.* There will certainly be market ups and downs along the way, but your longer lifespan would likely work for you, not against you. That’s because you’ll benefit from the positive impact of compounding1 and an opportunity to recover any market losses.
Working hard to live longer without investing to live longer? Bad idea.
That’s why healthy and wealthy go together. And wise.
A secure financial future isn’t just a good idea for the long and healthy life you plan to live—there may also be a correlation between the two in the short term. One study of a company’s employees showed that those who contributed to a 401(k) had improved blood test results and health behaviors 27% more often than those who did not contribute to a retirement plan.
A survey by TD Bank reported that simply having a financial plan in place made 80% of respondents feel satisfied with their overall health and well-being. The same survey concluded that financial satisfaction increases among those who are satisfied with their physical health, and vice versa.
It’s as if financial and physical health do their own sort of compounding — when one gets better, so does the other—so why not maximize both?
Albert Einstein is reported to have called compound interest the “most powerful force in the universe.” In a nutshell, if you invest $100 and earn 10% on it, you earn $10, for a total of $110. If you then earn another 10%, you earn it on the $110; so you earn $11. Do this again and again and it really adds up.
We assume a 30-year old woman earning $85,000 per year, with no current savings, retiring at age 67 with a target retirement income of 90% of her pre-retirement salary, or $116,743, including long-term inflation. We assume she saves 20% of her salary into a tax-deferred account that has an average expected return of 1%.
To determine the likelihood of reaching her target income of $116,743, we used a Monte Carlo simulation—a forward looking, computer-based calculation in which we run portfolios and savings rates through hundreds of different economic scenarios to determine a range of possible outcomes*. Those results showed she has a 3.4% chance of achieving her target income in retirement.
Instead, if her 20% savings are invested in a diversified portfolio of roughly 50% equities and 50% bonds, the Monte Carlo simulation results showed an 85% chance of achieving her target income in retirement.**
*Provided by Morningstar Investment Management LLC, a registered investment adviser and subsidiary of Morningstar, Inc.
**Since this scenario is simulated, there can be no assurance that a client will achieve her target income. Hypothetical data does not represent actual performance and should not be interpreted as such.