We are all living longer today, which is terrific – if you planned for it.
However those of us who are retired or nearing retirement face 7 key retirement risks and living longer is the overarching risk, it is a risk multiplier because it compounds the other risks faced in retirement. For example if you retire at 65, and die at 68 it does not matter if the market crashed, it doesn’t matter how much you were withdrawing each year and it doesn’t matter if you didn’t have long term care protection – none of it matters because you did not live long enough. But if you live to 80, 85 or 90 then all of those other risks matter and not being protected against them could wipe you out.
According to the National Association of Insurance Commissioners and the Center for Insurance Policy Research “Longevity risk refers to the risk that actual survival rates and life expectancy will exceed expectations or pricing assumptions, resulting in greater-than-anticipated retirement cash flow needs. For individuals, longevity risk is the risk of outliving ones’ assets, resulting in a lower standard of living, reduced care, or a return to employment.”
Outliving one’s assets is the biggest concern that consumers face today. I am going to cover some solutions in this blog post and other solutions in coming posts within this series.
The Problem: No one knows exactly how long they will live, which makes it difficult to secure an adequate income to maintain one’s lifestyle for an unpredictable length of time. If your retirement plan takes you to age 80 and you live to 90 then you have a 10 year gap. According to the Social Security Commission, once we reach 65 the average Life Expectancy for a male is age 84 and for a female 86, the odds we will live longer – 1 in 4 people will live past 90.
Do you have enough resources if you live longer than expected?
Information to consider: We cannot accurately predict how long we will live. But good planning to address this begins by getting a realistic view of our life expectancy
Getting a picture of Life Expectancy –
a) Looking at Life Expectancy Tables. To look at average life expectancy Social Security has created an online Calculator which can be accessed by clicking HERE.
b) Review your personal and Family health history & life span – your grandparents, parents and then your siblings
c) The online calculator that takes health and family history into account can be accessed by clicking HERE.
Solutions you can implement:
1) Arrange your retirement plan and asset withdrawal rate against the information you find in your life expectancy research from #1 above.
2) Working longer – Depending on your assets and your income needs in retirement, it may make sense to put off retirement for as long as possible. Let’s not forget that full retirement age was set at 65 at a time when life expectancy was 70. Work can often keep your body active and your mind nimble, health in retirement is important if you plan to enjoy it.
3) Deferring your Social Security payouts if you believe you will live longer than average. Remember that after age 62 (until age 70) every year that you delay taking your social security payments you will see approximately a 7-8% increase in your pay out amount. Social security payments (unlike some pensions) have a Cost of Living adjustment built in for inflation. Look at the delayed retirement credits HERE.
4) If the choice exists consider selecting the lifetime (annuity) payout option from your employer retirement plan versus the lump sum. This option can make the most sense for someone with a longer life expectancy, depending on your specific circumstances.
5) Assets with continuing income – Rental properties, Dividend paying stocks, proper withdrawal rates, withdrawal rates being done based on market performance, business interests which produce a continuous income.
Solutions we offer:
1) Creating a guaranteed income for Life. We call these paychecks for life – the one tool that can create a guaranteed income for life are annuities. You are more familiar with annuities than you think – Social security is a lifetime income annuity, a pension is a lifetime income annuity. So what would you do with an annuity? You would take your basic expenses and cover them with a lifetime income annuity – an annuity that will guarantee no matter how long you live your basic costs are covered. Doing this takes longevity risk off the table, it takes market risk off the table, it takes deflation risk off the table and it takes sequence of returns risk off the table.
Stocks don’t take longevity risk off the table, bonds don’t, none of the other products can create a guaranteed lifetime income. Annuities can.
It not only allows you to put your money in a safe vehicle with no market risk but it allows you to create a specified amount of income no matter how long you live. For many consumers a lifetime income annuity (often called Longevity Insurance) is used to create a “floor” or foundation for their retirement plan, for the income they have to guarantee.
We also call it sleep insurance. It’s simple, you know that check is coming and you can sleep well at night.
2) Then you take the rest of the portfolio and ladder in a long term care protection element and (for those who want it) legacy planning and then optimize it with inflation in mind; this is where stocks, bonds, real estate, gold, silver, etc. come in.
In our coming postings we will discuss time segmentation and asset laddering for maximum efficiency within a holistic plan – like the plan we do in our Retirement Prosperity Roadmap.
Summary: Longevity is something that all retirees and pre-retirees (and the financial professionals they work with) need to consider in doing any planning today. In today’s challenging environment you must educate yourself on the options and risks you face in retirement so that you can make well educated decisions for the long-haul.