The Greatest Risk to Your Retirement Might Not Be a Financial One
The research shows we’re living longer. Therefore, the greatest risk to your retirement might not be a financial one, but a circumstantial one.
Longevity risk, if underestimated, could result in the depletion of your retirement funds years before your death.
Data gathered by the United Nations and the Social Security Administration has shown that men in the U.S. are expected to live on average until the age of 77; however, if they reach the age of 65, their average lifespan increases to 84. On the other hand, women are expected to live to 82, but if they reach the age of 65, their average life span increases to 87. Moreover, a married couple at age 65 has a nearly 40% probability of at least one of them living to age 95 or beyond.*(*Mouton & Company, Inc.)
That being said, remember these are averages. We are all living longer. In fact, many clients in my practice are easily exceeding those numbers!
Can your retirement plan accommodate an additional 5, 10 or 15 years should you surpass your expected lifespan?
In your retirement planning, longevity risk is an unknown factor. My experience has shown the only way to prepare for an unknown is to do just that… prepare. That being said, the only way to truly prepare adequately for your retirement is to establish an income that you cannot out live. Doing so will insure that you’re not only ready for whatever life has in store for you, but that your income will be as well…regardless of your eventual lifespan.
So, how do you do that? First of all, forget about the averages and so-called life expectancy calculators. As I tell my clients, plan for a long life!
Better to be prepared than surprised.
Start by calculating what income you’ll need, and then subtract from that number all of your GUARANTEED income sources (Social Security, Pensions, Etc). The amount left over is what we need to replace with a supplemental guaranteed source. While there are many ways to generate income (dividends, interest from bonds, REITs, Limited Partnerships, etc.) due to the heightened uncertainty of the markets, I’m increasingly leaning toward annuities for this component of income. Now I know what you’re thinking… “Yuck, I don’t like annuities!” Traditionally, I’m not a huge fan either. However, in this instance, when attempting to generate a source of guaranteed income, I am a fan of protecting a small portion of your assets in a very specific type of annuity. One that will not only generate an income that will last as long as you do, but – and this is key – will enable you to maintain access to and control of your money while doing so.
Now, that doesn’t sound so bad does it?
With your core income now secured with guaranteed sources, your remaining assets may be prudently invested as a source for additional income as it’s needed. Following this approach, as many of our clients do, will ensure your income’s longevity will never be out lived by your own.