Have you ever thought about the possibility of living past the age of 100? It may seem unattainable, but you should probably plan for it – just in case. There are currently about 722,000 centenarians in the world, and it’s predicted that by 2050 that number will rise to 4 million.1
With ever-increasing life expectancies, it’s no wonder 63% of American adults say they’re more afraid of running out of money in retirement than they are of death.2 That’s why it’s vitally important to consider longevity risk when you’re planning for your financial needs in retirement.
What Is Longevity Risk?
Longevity risk refers to the possibility of living longer than expected and exhausting your retirement savings. According to the Social Security Administration, the average life expectancy for males who are currently 65 is 84, and 87 for females. But, one in three will live past the age of 90, and one in seven will live past 95.
Based on these numbers, your retirement period can unexpectedly last 30 years instead of 20. Without a proper retirement nest egg, those 10 years could be met with a personal financial crisis. Here are some strategies can you employ so that your money lasts as long as you do.
Set a Budget (and Stick to It)
While seemingly a basic concept in the financial planning toolbox, a budget can uncover bad spending habits unbeknownst to people. You may not be aware of the total cost that extra coffee every morning and going out to lunch every day adds up to. These are clearly cliché expenses most people advise to cut back on, but the purpose is to pull back on discretionary spending where possible.
Sticking to a budget allows you to monitor your finances and keep you on track. If you find yourself needing to stretch out your retirement savings, you already know where you can start cutting back. Start creating your budget by determining what your necessities, wants and savings. For some people, the percentage of the three categories will fluctuate.
Minimize Risk
Implement an investment strategy that takes market risk, inflation risk and time horizon into account. As you get closer to retirement your asset allocation should change. Additionally, be sure to account for the tax confusions of different investments in taxable brokerage accounts and retirement accounts.
Younger investors tend to be weighted more heavily toward stocks and aggressive investments. That’s because they have many years to earn the funds back through work or other investments. However, as you age, you need to downsize your exposure from this type of risk. The focus becomes more about preservation than growth. Stay within your risk tolerance level and protect the wealth you’ve worked so hard to build.
Plan for Healthcare Expenses
The average healthy 65-year-old couple who retires in 2024 can expect to pay $289,622 in lifetime Medicare and supplemental insurance premiums and out-of-pocket costs.3 This excludes long-term care.
Most people don’t have that much in their retirement accounts to live on, let alone to cover medical costs.
Even with Medicare, there could be significant out-of-pocket expenses and many conditions or treatments that are not covered. Create contingency funds to offset the damage that healthcare costs could do to your retirement income and consider creating a long-term care plan.
Maximize Social Security Benefits
Social Security is a major part of your retirement plan. It was designed to replace 40% of an average worker’s wages. However, there is no one-size-fits-all claiming strategy, so it’s critical to work with an experienced professional to make the right decisions.
For married couples, picking when to take these benefits can be flexible. One spouse may take at their Full Retriemnt Age, while the other waits until they are 70 to maximize the benefits paid. The longer you wait, the higher the benefit.
Monitor Your Retirement Strategy
Life changes at a rapid pace. Stay on top of your plan and regularly reevaluate your financial situation. This can prevent major surprises down the road and will help you correct any issues. Work with your financial advisor to continuously monitor and readjust your retirement strategy, if necessary. You may need to increase your catch-up contributions or consider alternative income streams to make your money last longer.
Don’t Let Fear Stop You from Actively Saving
There’s no way to predict exactly how long you will live, but don’t let the fear of the unknown hinder you from being proactive. Work with an effective financial team to create a strategy that will reduce the impact of longevity risk on your finances. How can you find your financial freedom?
1 Pew Research Center, “U.S. centenarian population is projected to quadruple over the next 30 years,” January 9, 2024.https://www.pewresearch.org/short-reads/2024/01/09/us-centenarian-population-is-projected-to-quadruple-over-the-next-30-years/#:~:text=Centenarians%20currently%20make%20up%20just,Americans%20ages%20100%20and%20older
2 Allianz, “Nearly 2 in 3 Americans Worry More About Running Out of Money than Death,” April 9, 2024.https://www.allianzlife.com/about/newsroom/2024-Press-Releases/Nearly-2-in-3-Americans-Worry-More-about-Running-Out-of-Money-than-Death#:~:text=MINNEAPOLIS%20%E2%80%93%20April%209%2C%202024%20%E2%80%93,North%20America%20(Allianz%20Life)
3 Fidelity, Retirement Health Care Calculator. https://communications.fidelity.com/wi/tools/retirement-health-care/
Ryan Egolf is a non-registered affiliate of Cetera Advisor Networks, LLC.
This information may not be relied on for the purpose of determining your social security benefits or eligibility, or avoiding any federal tax penalties. You are encouraged to seek advice from your own tax or legal professional.
The opinions are those of the writer, and not the recommendations or responsibility of Cetera Advisor Networks LLC or its representatives.
