With an increase in life expectancy, many retirees need to prepare for a long retirement ahead of them. As of 2022, the average retirement age is around 64 in the United States. The United States is also home to the highest number of centenarians in the world estimated to be around 97,000. If you retire at the age of 65, as per the Social Security Administration (SSA) you are looking at another 19 to 21.5 years ahead of you. Additionally, at least a third of 65-year-olds can reach 90 years of age and one in seven 65-year-olds may likely live beyond the age of 95 years.
Retirement planning involves preparing for the unexpected. Apart from saving enough money for the future, you also need to plan for a retirement that may last a considerable amount of time, based on different factors such as your health, retirement age, medical advancement in the future, etc. Consider consulting with a professional financial advisor who can help you protect your retirement and ensure you have enough money saved for your golden years.
In this article, we will discuss longevity risk and the different ways in which you can protect your retirement savings.
What is meant by longevity risk in retirement?
Simply put, living beyond life expectancy rates is termed a longevity risk. For example, suppose you live beyond 79.05 years of age i.e. the current average life expectancy in the US, you would risk running out of money in retirement. Ideally, both longevity risk and retirement savings should be balanced meaning if you have adequate savings, you can live a financially secure and comfortable retirement. That said, it doesn't usually happen as many people lack the necessary financial discipline to save for retirement and risk outliving their retirement savings. Further, longevity risk can lead to an increase in health expenses and insurance premiums as people of advanced age require better health insurance schemes and long-term care owing to a greater number of health issues.
What are the different ways by which you can protect retirement savings?
There are certain steps you can use to ensure you have an adequate retirement corpus:
1. Start planning for retirement from a young age
If you begin retirement planning from a young age, you can not only lower longevity risk but also take advantage of a longer investment horizon. Doing so allows you to weather market fluctuations and help boost your gains in the end. In addition, you can make the most of the power of compounding to earn significantly more. Having a long-term investment approach is beneficial as it helps reduce the impact of lost opportunities, making untimely exits, and emotional decisions. Herein, your money keeps growing at a steady pace ensuring you have a secure financial future in the long run.
2. Ensure you have enough saved for retirement
Having a sufficient retirement corpus would allow you to meet your financial needs post-retirement and ensure you have peace of mind. Consider different factors such as the age you retire at, your tax liabilities, the duration of your retirement, the state you reside in, the number of dependents you have, and more, at the time of planning for a financially safe retirement. With advancing age, you may also have to pay attention to your health issues. With deteriorating health in your 50s or 60s, your health expenses may shoot up requiring more money. If you are thinking of retiring earlier than the average retirement age, you would need to save more aggressively to ensure you have a substantial retirement fund. Be realistic when it comes to your retirement income goals and pay attention to your health. Further, you can keep a tab on your savings and check if you are on track with meeting your needs with the help of retirement calculators.
3. Delay withdrawing your Social Security benefits
You can further boost the value of your Social Security check if you delay claiming it by a few years. Normally, you would be able to start withdrawing your benefits at the age of 66 (if you were born before the year 1960) or 67 (if you were born in the year 1960 or later). However, if you wait till you are 70 years of age, you can increase the value of your Social Security check by 32%. In fact, for every year you do not claim your benefits, your monthly check value goes up by an extra 8%. Compared to the cost of living adjustments (COLAs) for Social Security benefits (which comes at 1.5% per year on average), it is much higher than that. Moreover, if you have enough money saved up for the initial years of your retirement, you can easily wait till you turn 70 to claim your Social Security benefits. Doing so would allow you to mitigate the effects of longevity risk if you live past the average life expectancy.
4. Plan your withdrawals systemically
To ensure you do not make an early or untimely withdrawal, you must plan your withdrawals keeping in mind your total savings, the prevalent inflation rate, your changing financial needs, and more. You can easily become complacent looking at your entire retirement savings as a whole but you have to remember that these funds have to last the remainder of your life. Also, you may not have an additional income source other than your investment returns and savings to bank upon. You may also have to grapple with rising health costs, unplanned financial emergencies, inflation, etc., that would further diminish your retirement fund. Avoid making a significant withdrawal in the initial years of retirement as that can leave you financially unprotected later.
You can use the 4% rule to time your withdrawals systemically. Herein, as per the rule, you can withdraw 4% of your total retirement savings in the first year of your retirement after which you can adjust your withdrawals as per the prevailing inflation rate. You can also use any other strategy of your choice but take care to follow a balanced withdrawal rate for your retirement. Having a longer withdrawal rate in the initial years of retirement would help ensure your retirement fund lasts longer.
5. Add annuity plans to your investment portfolio
Annuity plans are financial products that offer assured payouts to retirees ensuring financial liquidity for life. These plans are low-risk and provide a guaranteed income stream for life. There are primarily two kinds of annuities – immediate and deferred. In an immediate annuity plan, you can begin receiving payouts immediately after making a lump sum premium payment whereas, in a deferred annuity plan, you can determine a set date in the future when you would start taking payouts. Before investing in an annuity plan, take care to compare the interest rates of different plans as the rates are fixed at the beginning of the policy term and remain the same for the entire duration of the annuity plan. Hence, choose a plan that offers a high-interest rate to beat inflation.
6. Diversify your investment portfolio
Your choice of investments plays a critical role in securing your retirement funds. Diversifying your investments helps mitigate risk and save more money, thereby reducing longevity risk. If you want high inflation-beating returns, invest in high-risk, high-profit-generating investments like stocks, real estate, exchange-traded funds (ETFs), equity mutual funds, and even cryptocurrencies. At the same time, you would need to balance the risk by choosing relatively low-risk options such as bonds, government securities, and certificates of deposits (CDs), among others. Do not neglect to invest in tax-advantaged retirement accounts such as 401ks, Individual Retirement Accounts (IRAs), etc. Your money can grow on a tax-deferred basis meaning you would not have to pay taxes in retirement, thereby, protecting the value of your retirement corpus. Moreover, these instruments help inculcate financial discipline and follow a long-term investment approach.
You also have the option of investing in other tax-advantaged accounts such as the Health Savings Account (HSA) or the 529 plan that helps save for specific goals such as meeting health expenses or funding college tuition. In an HSA, you can take advantage of tax-deferred growth tax-free withdrawals provided the money is used for qualified health expenses. When it comes to a 529 plan, you can benefit from certain tax advantages such as tax-deferred growth, tax-free qualified withdrawals, and tax-deductible contributions. By investing in the aforesaid tax-advantaged accounts, you can attain different financial goals without them impacting your retirement savings.
7. Engage the services of a financial advisor
Financial advisors are qualified professionals who have amassed years of experience, knowledge, and financial acumen and can help you understand longevity risk better. With their expertise, they can help you effectively plan for the future and meet your needs in areas concerning investment planning, estate planning, tax planning, retirement planning, and more. The advisor can also assist in creating a diversified portfolio and maintaining a budget to keep your expenses under control so you do not risk running out of funds. Additionally, as you near retirement, you may need to adjust your portfolio as the focus shifts toward capital preservation. You would also need to account for market fluctuations and rising inflation. Moreover, you would have to refresh your portfolio from time to time, sell off underperforming or loss-making investments and buy new investments. A financial advisor can help carry out all these tasks as well as reduce your taxes in retirement, thereby ensuring you have sufficient savings to live comfortably in retirement.
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To conclude
Due to medical advancements and increasing life expectancy, longevity risk is becoming a more common phenomenon. It is not uncommon to see retirees struggle to meet their living expenses. This may be due to a lack of planning or circumstances outside their control. Retirees need to plan for a scenario where they may live longer than they may expect to. Sound retirement planning can help you live comfortably in your golden years without worrying about money. Ensure that you start saving from a young age, do not overspend in retirement, and remain consistent when it comes to saving money.
It is advised that you consult with your financial advisor who can help you protect your retirement financially and create a suitable plan to ensure the same. Use the free advisor match service to connect with 1-3 financial advisors based on your financial requirements. All you need to do is answer a few simple questions about yourself and the match tool will help connect you with 1-3 advisors that match your financial needs.