Medical advances and better awareness of nutrition and fitness are helping us all to live longer, healthier lives. This is, indeed, great news. But comes with an important caveat: Longevity has become the biggest risk when you are planning for retirement.
So, how do you manage this longevity risk and ensure you do not outlive what you saved for retirement?
That, indeed, is a million-dollar question, sure to be on minds of many. While the best recommendation is to seek professional advice, here are three ways that could help.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
1. Have a realistic expectation of how long you might live
Recently, I was talking to a 50-year-old friend about retirement planning. I asked her how long she expects to live. She was so ready with the answer: 85.6 years. When I followed up how she knew so precisely, she said 85.6 is her life expectancy according to this calculator from the Social Security website.
Here is what is wrong with the expectation. The calculator gave her an “average” life expectancy for a 50-year-old female, not a realistic expectation of how long my friend might actually live. Put it another way, if my friend planned her retirement funds based on these expectancy numbers, she has a 50% probability to outlive her savings. Not a financially secure way to plan for retirement!
So, what are the alternatives? Here are a couple of options.
One option is to make your best judgment of your life expectancy projection based on your health, family history, etc. After all, no one knows your situation better than yourself! Otherwise, use tools such as the livingto100 calculator, which takes your ethnicity, family history, health habits, etc., into consideration and generates a more customized life expectancy for you.
In either case, the more accurate your life expectancy projection, the more accurate your retirement plan will be, and the less likely you will outlive your assets!
2. Maximize Social Security benefits
If you anticipate an extended retirement period and are afraid you could outlive what you saved, the best way to protect is: 1) to have income sources that last for however long you live, 2) to ensure the income source is protected against inflation.
Social Security as a retirement income source fits this paradigm perfectly – the benefits are for life for you and your surviving spouse, and the benefits are adjusted for inflation each year.
On top of this, Social Security offers you a way to increase your payout 8% each year you postpone drawing benefits. For example, if your full retirement age (aka FRA) is 67, and you postpone drawing benefits until 70, you have a guaranteed increase of 24% of your benefits. Yes, permanently – for the rest of your life – for however long you live! Moreover, if you die, your surviving spouse is eligible to receive the increased benefit as well - for her or his life.
So, putting aside the concerns that the system could go under, if your focus is to hedge against longevity, maximizing Social Security is an excellent way to do it.
3. Consider gradually phasing into retirement
Retirement planning in the 21st century is not an all-or-nothing proposition. If you expect to live till 100, and if you fully retire at 65, you’d end up having 35 years of retirement! That is a long period of spending while not earning. Not ideal for your financial well-being or your personal well-being!
So, here is something to consider: Phase into retirement gradually. In other words, do not turn on the full-stop retirement switch yet. See if you can scale back and work fewer hours in your current job. Alternatively, consider working part-time at a lower-stress job. Or pick up consulting work. Or be your own boss and start a business, as I did in my late 40s.
So, what do you think? Does this make sense? Are you ready to face the modern-day retirement planning challenges? If so, hope this article gave you some food for thought. For a customized solution, please consult with your financial adviser. Good luck!
-
Walmart's Transformative Ways Spark a 100,000% Stock ReturnWalmart's strategic store expansion and relentless cost-cutting have catapulted its share price over the years.
-
What DOGE is Doing NowThe Kiplinger Letter As Musk's DOGE pursues its ambitious agenda, uncertainty and legal challenges are mounting — causing frustration for Trump.
-
How Roth Accounts Can Ease Your Tax Burden in RetirementStrategic Roth IRA conversions can set you up for tax-free income in retirement and a tax-free inheritance for the people you love.
-
Are You a High Earner But Still Broke? Five Fixes for ThatIf you're a HENRY (a higher earner, not rich yet) but feel like you still live paycheck to paycheck, there are steps you can take to get control of your financial future.
-
Tax Diversification: Smart Ways to Preserve Your Nest EggA long and active retirement may be costly — and may even bump you into a higher tax bracket. Paying some taxes on your savings now could be the answer.
-
How to Thrive in Retirement: Balancing the TradeoffsTo cultivate a happy retirement, you need to tend to it as carefully as you would a flourishing garden, and that means making the right choices for you.
-
Kick the IRS to the Curb in RetirementThat 401(k) or traditional IRA you've filled with your hard-earned money could turn into a tax bomb. Before it blows, see if a Roth could help rescue you.
-
How to Stop Scammers Targeting Your Retirement SavingsAnyone can fall victim to a financial scam, but retirees can be more vulnerable than most, so stay alert to these common tricks that could catch you off guard.
-
Choosing a Trustee? These Six Tips Can Help You Pick WiselyHow can you be sure a trust will be managed properly, without causing a headache for the beneficiaries? The key is choosing the right trustee (and a backup).
-
Five Things That Are Spiking Your Insurance PremiumIt's a drag, but just as your expenses keep rising, so does the cost of doing business as an insurance company. That means higher premiums.
