How Living Longer Impacts Your Retirement
Americans are overall living longer — that’s the good news. The challenge associated with this good news is that those who live longer than they expected may find that their retirement savings are insufficient for such an outcome. If this is the case, a retiree may find themselves unable to continue to live their chosen retirement lifestyle or, worse, dependent on others when their money runs out.
As the average lifespan increases, more Americans find themselves facing the risk of outliving their retirement savings. But forewarned is forearmed, as the saying goes. Given the increased attention to this issue, it makes sense to incorporate the concept into your retirement planning.
Another risk factor that often comes into play as lifespans increase is inflation. Inflation, or purchasing power, risk refers to the impact that a rising cost of living has on a fixed income. Inflation can cause an amount that might have allowed you to retire comfortably when you were planning for retirement to fall short of doing so when the time comes to retire.
Both of these risks can complicate retirement planning as people live longer than in previous generations. By taking into account longevity and inflation risk in your retirement planning, you can limit their impact on your ability to live the retirement lifestyle of your choice.
Following are some steps you can take to improve the chances that your retirement savings will be enough to provide for you in retirement, even if your lifespan substantially exceeds your average life expectancy.
Plan for your income to extend beyond your average life expectancy.
While living longer than the actuarial tables predict is a good thing, if your retirement income doesn’t continue beyond that time frame, your quality of life is likely to diminish, even if you are still in good health. You can avoid this by planning for the non-guaranteed portion of your retirement income, not counting any funds you plan to leave as a legacy, to continue to an age well beyond your life expectancy. If it appeared you might outlive even this age, you could then make adjustments to your plans on an ongoing basis.
At what age should you plan for your non-guaranteed retirement money to run out? This is a question that must be answered individually depending on your personal circumstances and financial resources, but for those wanting to take a conservative approach, targeting 100 years of age is likely to cover the lifespan of all but a small fraction of people.
Build a retirement income buffer.
Especially for those on fixed incomes, such as retirees, inflation can negatively impact your standard of living in retirement by diminishing the purchasing power of your income. One way to prepare for such a scenario that can also help you overcome the risk of outliving your savings is to build a buffer into your retirement income projections. For instance, if you believe that a retirement income of $6,000 per month will be enough to pay your expenses, plan to save enough to generate $7,000 a month. Or if you think $7,000 per month will be enough, aim for $8,000, etc.
If your estimates are correct, you can place the extra funds in savings. If not, and inflation causes you to need more each month to live on than you initially planned, you can put your buffer funds to work to make up the difference.
Don’t forget growth.
While it’s true that you should invest more conservatively when you enter retirement, this doesn’t necessarily mean that you shouldn’t attempt to achieve at least some growth in your investments. Living longer exposes you to greater inflation risk. If you are living on a fixed income in retirement and your investments are low yielding, then if inflation picks up, you may find that your income is insufficient to support your lifestyle. By placing a portion of your retirement savings in growth investments, you can give yourself the chance to grow your savings and help offset any rise in the cost of living due to inflation.
Consider investment vehicles with guaranteed lifetime payouts.
While fixed income streams are subject to inflation risk, they can help counteract longevity risk by transferring the risk of living longer than expected to the entity sponsoring the payouts. Ideally, a retirement income portfolio should be balanced to take into account both inflation and the risk of outliving your savings. Thus, if a substantial portion of your retirement income already consists of fixed payments from sources such as pension plans, Social Security, etc., adding more fixed payments to your income stream may not be ideal. However, if you find your retirement income is disproportionately oriented to variable payout sources, such as mutual fund payouts, stock dividends, etc., which can decline due to market forces or are subject to being exhausted over time via withdrawals, it may be worthwhile to consider a product such as a fixed or variable annuity that guarantees income payouts for the entirety of your lifetime.
Securities through Independent Financial Group, LLC (IFG), a registered broker-dealer. Member FINRA / SIPC. Advisory services offered through Scarborough Capital Management, a registered investment advisor. IFG and Scarborough Capital Management are unaffiliated entities.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.