In the world of financial advisers, there are many theories about the best way to help clients create an income plan that will last the rest of their lives. Often, that phrase, “the rest of their lives," is a tricky variable to nail down.
Multiple surveys in recent years have shown that the No. 1 concern of retirees today is outliving their money.
On the other hand, it’s been our experience that some people have no aspirations of leaving a legacy to their beneficiaries or charity. They don’t want to leave any money on the table. We’ve had people tell us they wanted to spend their last dollar on their last day. We tell them “Great, tell us when your last day is and we can plan for that.”
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No One Knows When They Are Going to Die
Mortality tables are used to estimate how long the “average person,” at any given age, will live. The problem is that they’re not based on averages at all, but instead on bell curves. In a bell curve, half of the people fall above the mean and half of the people fall below it. According to the Social Security Administration’s mortality table, the average 50-year-old man can expect to live until almost 80. If you plan to live until 80 but live until 90, depending on your income strategy, you could be forced to reduce your standard of living.
There is No Hard-and-Fast Rule
Based on our experience of meeting with clients and prospects and speaking with other professionals, there are three main assumptions upon which retirement strategies are usually developed (based on a retirement age of 65):
- You should plan to live 30 years in retirement.
- You should plan to live 40 years in retirement.
- The length you plan for should be customized based on your personal details.
Each strategy has pros and cons. I believe each strategy should be tailored to fit the unique goals and objectives of every client served by a financial adviser.
Customization is Important
Typically in a meeting with someone, when we’re looking at this topic, we ask them a number of questions. For example:
- How long did your parents live?
- How is your health today, compared to their health when they were your age?
Given the role genetics plays, it may make sense that if you are in significantly worse health than your parents who only lived a few years beyond their retirement date, you might be able to plan for a shorter life span.
Estimating Your Life Expectancy is Only the Beginning of the Conversation
The real work begins after you and your financial professional have decided on a target longevity date. Retirement income planning can be a complicated and highly personalized process involving many factors beyond life expectancy.
For example, your life expectancy may play a role in when you choose to begin taking Social Security. Couples may only account for one of three situations when it’d be wise to address all three potential scenarios:
Plan A: What if you both live to 100 or 105 years old?
Plan B: What happens to Mrs. if Mr. dies first?
Plan C: What happens to Mr. if Mrs. dies first?
Men statistically have lower life expectancies than women and therefore might have a tendency to want to maximize their Social Security benefits over their lifetime by claiming earlier.
This decision could dramatically impact their spouse if they pass away first. When one spouse passes away, the surviving spouse will only be able to keep the higher of the two Social Security checks, not both. Therefore, if even one spouse has a longer life expectancy, it might make sense for the spouse with higher Social Security benefits to claim them as late as possible so that the check is larger for the surviving spouse.
A happily married couple 65 years old, statistically, have a 72% chance of at least one spouse living to age 85 and a 45% chance that one will live to age 90. Sometimes even using your retirement assets to bridge the gap between 62, full retirement age (66 or 67 depending on the year you were born) and even 70 years old could be an option depending on what your goals are.
You also must take into consideration other retirement assets, whether either spouse will be forced to retire earlier than expected, and whether you’ll use spousal benefits or claim based on your own earnings record.
Plan for Spending Down Your Portfolio
In retirement, life is often unpredictable. When you’re creating an income plan that needs to last a long time, it’s best to be proactive in your planning. Consider all the possible expenses that could come your way. We like to discuss the possibility of higher health care costs, higher taxes, helping a family member financially and divorce, among other things. You should create a plan with the flexibility to take into account these unforeseen possibilities. Most people are reactive, and when something happens they’re caught on their heels.
Factor in the Risk of Compounding Inflation
Inflation is a risk that most people simply don’t fully consider. Even with a 3% average annual inflation rate, the purchasing power of a dollar will fall by more than half, after 25 years. When we meet with people who are very conservative and want to take very little risk with their money, they often have most of their money in fixed-income securities, such as bonds or CDs. While these assets are often considered “safer” because they are more conservative than other investments, these assets may not be able to support a retiree’s long-term spending goals. As you spend down your retirement savings, inflation is costing you more money to live. Retirees should understand the long-term cumulative impact of inflation on their portfolio during retirement.
There is No One-Size-Fits-All in Retirement Planning
It’s all about asking the right questions and finding out what’s important to the client. The days of going to a financial adviser to just invest your money are over. Today it’s about planning for a long, happy and healthy retirement. Finding the right adviser, one who specializes in retirement planning, is a good first step to your financial future and the legacy you leave.
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