We’ve been telling clients for years that longevity – and the risk of outliving your money – is changing how you need to save and invest for retirement.
Now the headlines are finally catching up to what we’ve been saying all along.
“Longer life expectancies are ratcheting up the pressure on retirees to make their money last as long as they do,” proclaims a recent Wall Street Journal article by Karen Damato.
What happened? The Society of Actuaries (they compile the statistics used by the insurance industry) just revised their mortality estimates to reflect today’s ever longer lifespans.
The average 65-year old woman today is expected to make it to almost age 89. That’s an average, meaning that about half of all women will live even longer.
Men are expected to live on average to almost age 87, with roughly half living longer.
Here’s how this knowledge plays out in our office as we talk to clients about adjusting their financial plans to the new longevity reality.
The future’s so bright, you gotta wear shades. When we prepare retirement forecasts for clients, we usually assume they’ll live to age 95, or even 100, if they have parents now alive in their nineties. (We are continually amazed to learn how many friends and clients do have parents living – and, indeed, prospering – into their mid- to late-nineties!)
“What?” they say.
“I’m not going to live that long!”
But what if they do? If we only knew exactly how long someone would live, our job would be a lot easier. We would make sure they spent just the right amount of money each year, with not a cent to spare on their last day on Earth.
But, alas! It doesn’t work that way. In real life, all we can do is estimate how long you’ll live and recommend you adjust your spending accordingly.
Making an impact. What’s the impact of living longer? No secret. You either need 1). a lot more money going into retirement, 2). a delayed retirement date, 3). a reduced spending plan, or 4). higher investment returns, or better yet, a mix of all four.
The worst case scenario? You procrastinate and don’t save enough, bad health or other circumstances push you into early retirement, you chronically overspend, and you avoid risk by sitting in cash and CDs. That’s longevity Armageddon.
On the other hand, you’re likely to enjoy a long and prosperous encore if you save diligently, invest wisely, retire on schedule and monitor your spending. (And you’re guaranteed to be our absolute favorite client!).
Make the best of what you’ve got. Today’s longevity has made it more important than ever to use your resources wisely. A significant resource, even for the wealthy, is Social Security. We advise clients on the optimal strategy to claim their Social Security benefits so they can maximize their lifetime income (believe it or not, there can be a difference of several hundred thousand dollars between options!).
People don’t always want to hear that delaying could be the best strategy. Many clients want to take their benefits as soon as possible, but today’s longer life spans have irrevocably changed the Social Security game plan.
Stay on the yellow brick road. We work hard to keep you on course once you’re in retirement. We continually review and adjust your portfolio, and tweak your spending strategy to make sure it’s not too high or too low. (Yes, we actually do ask certain clients each year to please spend more money!) There are a couple of different dynamic models we use to come up with your annual spending targets, but the important point is they do adjust for changes in the investment environment and your expected lifespan.
The takeaway: The new longevity reality is not necessarily something to fear. But it is something you need to manage so you don’t run out of money before you run out of life.