Longevity Risk and Retirement Planning: Tips for Overcoming Uncertainty
A number of recent studies indicate that today’s Americans have a higher life expectancy compared to previous generations. The Social Security Administration suggests that after reaching the standard age of retirement, 65, U.S. men and women may anticipate living at least a couple of decades more.
There is no denying the fact that a longer life is a reason to celebrate. However, this increased longevity certainly adds new challenges in the process of retirement planning. While living a longer life is a worthy milestone for most, whether it will be enjoyable is largely based on the question of whether its quality is high. So, it’s prudent to pay careful attention to longevity risk in retirement planning – that way you are well-prepared for the uncertainty of potentially spending decades in your post-work life stage.
Impact of Longer Life on Retirement Spending
In retirement, people often have fewer wages or even no salary for income anymore. If they were an entrepreneur, chances are they have scaled back their involvement in their company. Income from their business may not be as significant as before.
Now, investors must rely upon the savings and assets they have accumulated throughout their lives. It’s a period of decumulation, or when they start making withdrawals from various sources to fund their retirement spending needs. These sources may include 401(k) plans, IRAs, brokerage investment accounts, bank savings accounts, and other vehicles. Depending on their work history, people may even have a defined-benefit pension that will provide steady, permanent income payments.
The level of retirement income you might enjoy depends largely on the amount of money you saved over time. As you worked, you also paid taxes toward Medicare and Social Security. Lifelong income benefits from Social Security will likely play an important role in your retirement finances.
The important question to answer is this: “How will you ensure that your money lasts for as long as you may live?” If you have a partner, you will need to address the question of survivorship and its financial implications, as well. With today’s advances in medical care and technology, a married couple has a 25% chance of one partner living to age 97! This increases the chances of you outliving your money and raises the stakes for those at great risk of running short of savings in retirement.
Retirement Planning Tips for Longevity Risk
Start saving early and as much as possible, and if you are in your fifties, start catching up so you can plan more confidently. When getting started with a career, planning for the later stages of life can be difficult to imagine. Our current lifestyle and goals – not to mention current household expenses – may appear far more pressing at this stage. For that matter, post-retirement may seem like it’s “forever” away for someone in their twenties or thirties. You are certainly not alone, if you are hesitant about putting more funds toward employer-sponsored plans or private retirement accounts.
However, if you are in your fifties, now may be time to start playing catch-up on your savings, depending on how consistent and committed you have already been with saving. And each year you put off making contributions to your retirement accounts, is another year you don’t benefit from the power of compounding. If you haven’t started already, or need to get back into the saddle with your saving goals, it’s prudent to start as soon as possible.
Always remember that it’s never too late to get started. Again, if you are nearing retirement and don’t have a plan in place, now is an ideal time to get started. You may want to start considering ways to preserve your wealth, protect your assets, and ready for a transition to a retirement-income-spending phase.
Not only does longevity risk raise the stakes for potentially running out of money – it also enhances the effects of taxes over time. You will want to consider ways to minimize your tax burden while creating a personal strategy for reliable, lifelong retirement income.
Qualified longevity annuities might be a great option, because these contracts start paying out only after the contract holder reaches an advanced age. The primary purpose of these annuity contracts is to protect contract holders from running out of money at a later stage of life. They are also designed to help you meet withdrawal obligations imposed by the IRS and “spread out” your tax liability over time. Ask your insurance or financial professional for more information.
Defer your retirement, if it makes sense and is possible. If you are still working, there are a number of reasons why you might consider deferring your retirement. Those might include:
- You will have more income from wages or your business to invest and accumulate more wealth
- Your money will have more time to grow tax-deferred in retirement accounts
- You will accrue more Social Security credits
- Your Social Security benefit will grow the longer you delay in claiming it
Claiming Social Security early may make sense if your family medical history suggests a shorter lifespan or you worry about getting the most out of your benefits. It’s prudent to work with a financial professional who understands claiming strategies and can determine what is right for you. Unfortunately, many Americans claim Social Security early and settle for permanently slashed benefits for less-than-ideal reasons.
Build a longevity plan that suits your needs. Your family and friends may have different opinions about the best longevity plan for you. However, what works for them or has been successful may not be right for you. Everyone’s financial needs and goals are different, so why should they have the same strategy for managing longevity risk?
In retirement, your financial plan needs to emphasize income, risk management, safety, and protections. Longevity is a “risk multiplier,” in that it augments the effects of many other risks over time. Inflation, taxes, market corrections and their effects, the danger of withdrawing too much too early… the list goes on and on.
So, make sure your retirement plan prepares you to spend potentially 20-30 years or more in retirement. You will want protections that guard against these risks, minimize their risks, and ensure you will have sufficient cash-flow for all of your retirement years. Working with a financial professional who understands retirement and the importance of these safeguards is advisable.
Also, don’t forget inflation. Your money will need some growth opportunities so it continues to increase against inflation and its effects.
Don’t underestimate life insurance. Many of you may have come across different advertisements or promotions that promise lucrative benefits for selling off your life insurance policy. If longevity planning is your priority, this may not be a good idea. Life insurance provides the opportunity for a tax-efficient wealth transfer later on. And should you want tax-advantaged retirement cash-flow, cash value life insurance can provide healthy income that is potentially tax-free.
Moreover, by retaining your life insurance, you will be able to leave behind something valuable for your heirs; even if you end up spending all your other assets. Various life policies may also come with living benefits that allow you to allocate part of your death benefit or cash value toward costly health and long-term care costs. That can help with alleviating the cost-heavy expenses of health and personal care as you age.