What Longer Life Expectancies Mean for Retirement Planning
Consider the following information from the Society of Actuaries for Individuals age 65 with average health and are non-smokers:
A couple at age 65, has a 50% chance that at least one spouse will survive to age 92 and a 25% chance that one spouse will survive to age 96.
Males age 65 have a 50% chance of living to at least age 86, while females age 65 have a 50% chance of living until at least age 88.
Let’s face it, seniors today have access to improved medical care and are healthier, more active and are likely to have longer lives. So what are the financial implications for retirees who will likely live well into their 80s and possibly their 90s?
We believe from a financial standpoint, retirees need to make financial planning decisions that reflect the higher probability they will live longer. Here are a few recommendations:
Make appropriate investment and asset allocation decisions.
With longer life expectancies, an investor’s time horizon is extended. As such, retirees need to have a portfolio that not only reflects their risk tolerance, but one that will also endure for an extended period of time. We would suggest the following:
Avoid investing your portfolio too conservatively
Maintain a “safety net” that consists of low risk investments
Utilize investments with low internal fees
Weigh current tax costs/benefits against future tax costs/benefits when selecting investment account types
Approach Social Security (and other pension) decisions strategically.
The important decision of when to begin receiving Social Security retirement benefits can have material implications. When making this decision, we suggest couples plan together based on their joint life expectancy and personal health situations. It may be important to consider delaying benefits for one or both spouses in order to allow the benefit to increase with delayed filing.
Make tax-efficient distribution decisions during retirement.
When taking portfolio distributions during retirement, it is critical that the tax impact of these withdrawals be considered. For example, a qualified withdrawal of $100,000 from a Roth account would net $100,000 in purchasing power. However, if you are in the 32% tax bracket, a $147,000 withdrawal from a pre-tax retirement account would be needed to generate $100,000 after tax. Given the changing tax laws and personal circumstances (changes in medical expenses, family dynamics, etc.), the decision of “Which account?” to take money from should be assessed at least annually. In addition, consider other planning strategies such as Roth conversions to take advantage of lower income years.
Make the correct decision of when to retire.
Because retiring is a critical decision (and often irrevocable), it is important to determine if you are financially secure enough to retire. Prior to making the final decision you should carefully consider the following:
Are my income sources and investments adequate to cover retirement expenses?
What would be the impact of certain unexpected events (long term care expenses, high inflation, low investment returns, etc.)?
What can be done to increase the probability of a financially secure retirement?
If you have any questions or would like to discuss financial planning strategies that can help you make sound retirement planning decisions, please feel free to contact our office.