Retirement Strategy: Money & Longevity

"It's paradoxical, that the idea of living a long life appeals to everyone, but the idea of getting old doesn't appeal to anyone." - Andy Rooney

When considering your retirement income plan, how much thought do you give to how long you might live? It can be an uncomfortable reality to consider, but this shouldn't dissuade you from giving it some serious thought.

For many people preparing for retirement, one of their biggest fears is running out of money. According to Social Security Administration data, if you have lived to 65 years of age, you will probably live to at least 84 years if you're male and 87 years if you're female. These are only estimates, but it's important to keep in mind that you might live much longer than you expect, and some household members could outlive others by many years.¹

You might, in fact, live to 100 years or beyond: the National Institute on Aging anticipates that the number of centenarians will grow by a factor of 10 during the first half of this century, representing a host of challenges for anyone attempting to develop a retirement plan.¹

For example, it is important to consider healthcare costs in retirement. As you age, your healthcare needs will likely grow from simple doctor's visits to potentially living in an extended care facility. These costs naturally increase over time, whether through inflation, market volatility, or other factors. So, while you can look at today's prices as a guide, you will likely need much more money to cover your healthcare expenses in retirement. Medicare will help, but it doesn't cover everything, including a lengthy stay in extended care.²  A long-term care (LTC) plan and potentially LTC insurance will be required to ensure that you have adequately planned for this potentiality.

Your retirement income plan might include a spending plan that takes into consideration the likelihood that you will want to travel more frequently, pursue your passions, and spend time with family. It is important to consider the very real fact that you may live a long life and will need to cover the associated financial expenditures. Unless you are working beyond retirement age, it can be difficult to make up for the inevitable market correction, emergency expense, or heavy spending. Therefore, your plan should be stress tested to assess the potential impact of these circumstances.

Do I have enough? That depends on how much you will need to withdraw per year without diminishing your desired standard of living. Your main enemy in retirement will be inflation - the slow, grinding erosion of your purchasing power. Each and every year in retirement, just about everything that you need to buy will cost more. Assuming a long-term inflation rate of 3%, it will take about $2.40 in the 30th year of your retirement to buy what one dollar did in the first year. If you don't have a plan for increasing your retirement income at least as fast as your cost of living is going up, then you may - without realizing it - have a plan for running out of money.

Other factors to consider include focusing on tax-efficient withdrawals from your retirement accounts. You might also decide that working longer or taking Social Security later (allowing for larger payouts per month) could further enhance your retirement plan. Of course, these topics and others will be addressed while working with a financial professional to develop a retirement income plan and put it into action. If nothing else, you should now appreciate what a significant undertaking is involved in developing your retirement income plan, as well as how relieved you will be to have such a plan in place.