With company sponsored pensions on the decline, more and more retirees are having to manage a large lump sum, like their 401(k), over an uncertain number of years instead of relying on steady, predictable income checks each month. This shift in retirement funding and responsibility is creating real challenges for retirees in how much to withdraw for living expenses, much less enjoying the retirement they always dreamed of.
Unknown factors like life expectancy become more important than ever to plan for, but no easier to predict.
Americans are living longer
There’s no way to accurately predict your specific life expectancy. If you live to 90 and older, how can you be sure you won’t outlive your money?
The good news is, there are steps you can take now to help ensure you are financially prepared to cover your expenses in retirement, no matter how long you live.
While a long life can be an amazing gift, without proper planning it can pose some real challenges in retirement.
Retirees could have a tough decision to make:
- Should I spend money early in retirement not knowing if I’ll run out or not?
- Or, should I spend less to ensure I’ll have enough if I reach 97 or even 100?
Retirees who worked hard and properly saved can spend the early years of their retirement doing what they’ve always wanted to do rather than reducing their lifestyle to ensure their lump sum will last as long as they live. Cutting back is one solution, but this may not be the best one for many retirees. Plus, it still may not be enough to minimize the longevity risk.
When it comes to longevity, the numbers game can’t be won on speculation.
Renowned retirement planning expert, author and mathematician, Moshe Milevsky, Ph.D., goes into great detail about longevity and retirement in his book, The 7 Most Important Equations for Your Retirement, which uses statistics and mathematics to take a scientific approach to retirement finance.
In an informative retirement planning workshop, Milevsky demonstrates how difficult it is to predict one’s own mortality and other variables that impact retirement planning like inflation and stock market volatility. One of his most important messages is this:
Your remaining lifetime is a random variable
While many retirees are concerned about the volatility of the stock market, the variability of your longevity is also important to plan for in retirement. And mathematically speaking, your longevity is just as unpredictable as the stock market.
Although we’ve gained several years of life expectancy over the last several decades, that doesn’t account for the risk and randomness of longevity. So, what does this mean?
Your specific longevity risk has the same order of magnitude as fluctuations in the stock market, so you should consider a risk management strategy to safeguard against outliving your retirement funds.
Ever use one of those online retirement calculators to determine how much you should have in the bank at retirement? One of the inputs is an estimate on how long you think you’ll live, or how long you’d like to plan for. But no matter what the national average is, or even what your family history tells you, the age to which you will live cannot be predicted with certainty.
While men and women could both mitigate their longevity risk through proper planning, statistically women live longer than men. That’s why one Heyday Retirement contributor wrote this article to help women be prepared for the (long) road ahead.
You CAN help ensure you won’t outlive your money by insuring against your longevity risk.
Logic in financial planning would dictate that you can:
This same logic could be applied to a retirement strategy. For example, the chances of living to 105 may be small but the financial magnitude could be significant. Insurance can be a solution to help mitigate this risk.
Living well past 65 doesn’t mean you can’t live well in retirement.
What does that mean for those in the retirement planning phase? Your retirement strategy can be:
Studies have shown that retirees who receive guaranteed income streams are happier and more confident than those with large lump sums in the bank that they must constantly manage over the course of their retirement.
So, how do you build a retirement income strategy that can help eliminate the longevity risk?
Start by indentifying your specific retirement concerns, goals and financial situation.
You can then use this information to guide your retirement income strategy conversation with your own financial representative or schedule a no-obligation, complimentary retirement strategy consultation with Heyday Retirement.
Either way, we hope you take the next step toward planning around your longevity risk so you can help ensure you are financially prepared in retirement, no matter how long you live.
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