Warning: your retirement may last longer than you expect.
The most important retirement income question is the one that no one can answer in advance: How long does your income need to last?
A successful retirement income strategy ensures your assets will last over your lifetime. But will that be for 20 years after you retire, or for 30, or 40? Most people underestimate their life expectancies by an average of five years. Underestimating life expectancy can lead to a miscalculation of the financial resources needed for retirement.
Longevity risk—defined as the risk that you will live longer than anticipated without adequate resources to support yourself throughout all stages of life—is perhaps the biggest risk to a financially secure retirement. The length of your retirement affects every facet of your retirement income strategy; how you should invest, protecting your savings from inflation, how much you can safely withdraw, and everything else.
How long can you realistically expect to live after you retire? With advances in medicine and other factors, retirements of 25 or 30 years are becoming commonplace. A financial strategy that projects out to age 85 or 90 may not be adequate, as more than one-third of couples retiring at age 65 will have one spouse live to age 95, and 15% will have one spouse live to age 100!
Are you prepared to live 30+ years on your retirement dollars? Couples in particular need to think long term. For more than 60% of couples retiring at age 65, one spouse will live to age 90. At age 65, there’s a 50% chance of living beyond age 85 for males, age 88 for females, and for couples, at least one spouse may live to age 92. There’s a 25% chance of living beyond age 92 for males, age 94 for females and for couples at least one spouse may live to age 97.
You can’t predict how long you’ll live. But you can reduce the risk of outliving your savings. Steps you can take include reviewing your family medical history for an indication of your own future. Keep in mind that people now commonly live longer than their parents or grandparents.
Then assess whether your retirement income is guaranteed for life. This may include pension plan benefits or annuities. It’s even better if the income adjusts with inflation to help you preserve purchasing power as you age.
Saving for retirement is a key goal prior to retirement but it doesn’t have to stop there. Dollars that went to fund college tuition or other expenses can be re-directed to help lift savings during your “stretch run” to retirement.
The future rarely goes according to plan so prepare for the unexpected. Retirement can come earlier than anticipated or expenses can appear from nowhere. Life can change in unanticipated ways. A bigger retirement savings cushion puts you in a better position to adapt to whatever comes along.
When creating a retirement income strategy, add at least ten years to projections of life expectancy to minimize the risk of underestimating your needs. Build retirement assets well in advance of your intended retirement date. It’s common for people to stop working earlier than expected. An illness, merger or reorganization can lead to an earlier than expected retirement date. Obtain an independent perspective from a financial advisor to help you evaluate whether you’re on track to achieve your goals. With a sound strategy, your advisor can help you prepare for retirement income for the long run.