Longevity risk refers to the risk that actual survival rates and life expectancy will exceed expectations. To pension plan administrators, this means that the pricing assumptions and life expectancies of retirees results in a greater-than-anticipated retirement cash outflow. To individual retirees, it means that we will outlive our retirement savings.
Data published by the Society of Actuaries shows that the life expectancy of a male attaining age 65 in 2000 was 84.6 and increased to 86.6 for a male retiring in 2014. Similarly, life expectancy for a female increased from 86.4 to 88.8 during that same period.
So, the good news is that Americans are living longer and many are living healthier lives. The bad news is that because Americans are living longer many will outlive their savings and will become dependent on their families and government welfare for their basic living needs.
Transfer the longevity risk to lifetime guaranteed income annuities. Income annuities guarantee a lifetime income that you cannot outlive. Similar to social security and pension plans, income annuities last as long as you do and could also provide a remainder to your heirs.
Delay retirement and/or the start date of social security benefits by two years. Assuming that your full retirement age is 66 and your monthly retirement benefit is $1,500 at age 66, by delaying the social security beginning date to age 68, you can increase your monthly benefit by 8% each year ($120) for a monthly increase of $240 at age 68.
Save more during your working years. Saving 1% more each year for retirement can make a huge difference in your retirement nest egg.
Pursue tax-exempt investments and financial products like Roth IRAs to decrease the amount of state and federal income taxes paid on investments. Roth IRAs and tax-free municipal bonds can provide a tax-free income.
Limit the amount of annual withdrawals from your retirement nest egg to 4% of the beginning balance. If your retirement account balance when you begin your retirement life is $500,000, then your annual maximum withdrawal should be $20,000 in the first year. In subsequent years you can give yourself a cost-of-living adjustment. Depending on your investment allocation and market fluctuations, adjustments will need to be made periodically. The 4% rule is generally accepted by many CFPs as a prudent way to devise a distribution strategy, but annual reviews of the strategy are a must.
Prepare a preliminary retirement budget. Your cash flow will be dramatically different in retirement because your sources of income and uses of that income will be very different.
No matter what your financial situation is as you begin your retirement, there are several strategies you can use to make your nest egg last as long as you do.
Financial planning is just one of the many member benefits available to Western Fraternal Life members. Call today to see how Western Fraternal Life can help you reach your financial goals.
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