The Downside to Longevity
The good news: We are living longer! The bad news: We are living longer!
The downside: Research shows that 8 out of 10 adults over the age of 50 are significantly underestimating their life expectancy: men by an average of 6 years and women by nearly 8 years. These figures are staggering and increase the probability that many will out-live their assets in retirement. This can have a devastating impact on your financial well being and quality of life.
So what can I do to ensure that my longevity is a benefit rather than a detriment?
- Give it your best guess – When considering an estimated age of death, don’t use generalizations. Give it some serious and careful consideration. Some things to consider:
- Family history
- Advancements in medicine
- Don’t plan to spend your last dollar at your estimated age of death – Safe distribution rates can help to ensure that your portfolio grows over time and is not cannibalized in the early years of retirement. Limit your annual distributions to no more than 4% of your total investable assets to increase the odds that your money outlives you.
- Keep on planning – A retirement plan is not a one-time, set it and forget it, endeavor. It should be carefully monitored and evolving. Consider a pilot taking a flight across the world. The flight path not only takes careful planning before take-off but it also requires course corrections to make sure the flight is successful. Retirement is no different. You could potentially be planning for a very long period of time, so it makes sense to course correct over time.
- Delay, delay, delay – If it is practical, it may be beneficial to delay retirement and/or collecting retirement benefits. If you are happy in your job, consider working an extra year. Avoid collecting social security before Full Retirement Age and if possible, wait at least an extra year to collect. If you are married, it might make sense for the higher earner to wait until 70 to collect the benefit, so the higher benefit is maximized for whichever spouse lives the longest. Due to its annual Cost of Living Adjustments (COLA) and your ability to increase benefits by delaying, social security itself can serve as “longevity insurance.”
Living longer should be a good thing. Retirement planning is therefore more important than ever. There are a lot of nuances to retirement planning and it does require some thoughtful guess work. But with careful and ongoing planning, your money should not run out before your time does.