Planning for retirement is about diligent saving and wise investing to help ensure your funds last as long as you do. With increasing life expectancy, understanding and mitigating longevity risk—the possibility of outliving your retirement funds—is more essential than ever. Here’s what you need to know and do to build a nest egg capable of sustaining you throughout your golden years.
Modern Life Expectancy Trends
Advancements in healthcare, improved nutrition, and safer lifestyles mean life expectancy is rising. In the United States, the average life expectancy is approximately 78 years—75 years for males and 80 for females. However, those who survive accidents, injuries, and diseases that disproportionately affect young people are likely to live well into their 80s or beyond. A 65-year-old man who retires today can expect to live 17 more years (until age 82), while a woman may have 20 years remaining (until age 85).
These trends are a double-edged sword. On one hand, living longer means more time to spend with family, pursue hobbies, and enjoy life. On the other hand, you face the challenge of stretching your retirement savings to cover decades of expenses.
Projecting Your Post-Retirement Lifespan
Predicting how long you’ll live after retirement isn’t an exact science, but informed assumptions are possible. Here are some tools and considerations to help you make educated estimates:
- Factor in health and lifestyle: Your health history and daily habits greatly affect your life expectancy. For example, non-smokers, those who maintain a healthy weight, and people who exercise regularly are statistically more likely to live longer.
- Account for genetic factors: If your parents or grandparents lived well into their 90s, you might have similar prospects. Conversely, a family history of certain illnesses might indicate a shorter lifespan.
- Reassess regularly: Life expectancy projections aren’t static. Changes in health, lifestyle, or medical advancements affect how long you might live. Revisit your assumptions as you age to keep your retirement plan on track.
The Impact of Longevity Risk on Retirement Finances
Longevity risk addresses the financial challenges that come with living longer. The primary risk is running out of money, but secondary risks include inflation eroding your purchasing power or unexpected healthcare expenses draining your savings.
For example, a couple retiring at 65 might think their savings of $1 million will last comfortably for 25 years. However, if both partners live into their 90s, that $1 million might need to stretch 30 years or more. Factor in inflation, and it’s clear why longevity risk requires careful planning.
Strategies for Building a Sustainable Nest Egg
With information about life expectancy in mind, it’s clear you need a comprehensive plan to safeguard against outliving your savings. Here are five strategies to ensure financial security throughout retirement.
1. Adopt Sustainable Withdrawal Rates
A well-known guideline for retirement planning is the “4% rule,” which suggests withdrawing 4% of your portfolio annually. This approach should balance your need for income while preserving your principal for future use.
However, with people living longer and market volatility increasing, many industry professionals now advocate for more conservative withdrawal rates. Starting with a lower rate, such as 3.5%, provides more cushion against market downturns or longer-than-expected lifespans. You might also adjust your withdrawals based on market performance. When the market is up, withdraw slightly more; when it’s down, cut back.
2. Evaluate Lifetime Income Solutions
Lifetime income solutions help reduce the stress of managing withdrawals while providing a steady cash flow. Examples include:
- Social Security: Delaying Social Security benefits until age 70 increases your monthly payout significantly. Since these benefits are adjusted for inflation, they’re a critical component of a longevity-focused retirement plan.
- Annuities: These insurance products offer guaranteed payments for life or a set period, reducing the fear of running out of money. Annuity product evaluations can determine which type aligns with your retirement goals, be it a fixed, variable, or indexed annuity.
- Pensions: If you’re fortunate enough to have a pension, understand its payout options. Choosing a lifetime income stream over a lump sum often provides better protection against longevity risk.
3. Plan for Healthcare Costs
Healthcare is one of the largest and most unpredictable retirement expenses. Here are some options for offsetting those costs:
- Health Savings Account (HSA): If you’re eligible, contribute to an HSA during your working years. These accounts offer tax-free growth and withdrawals for qualified medical expenses.
- Medicare and supplemental insurance: Understand what Medicare covers—and what it doesn’t. Many retirees invest in Medigap or Medicare Advantage plans to cover gaps in traditional Medicare.
- Long-term care insurance: Consider purchasing long-term care insurance to cover expenses like assisted living or nursing home care, which can deplete savings quickly if left unplanned.
4. Diversify Your Investment Portfolio
A well-diversified portfolio balances growth and stability throughout retirement. Consider allocating funds across stocks, bonds, and alternative investments to manage risk. For ongoing cash flow, include income-generating assets such as dividend-paying stocks or real estate.
5. Use Professional Guidance
While DIY retirement planning works for some, longevity risk adds complexity that’s best managed with professional advice. A financial advisor can help you create a comprehensive plan to establish a substantial nest egg for the future. The best way to avoid overly cautious spending or reckless investing triggered by anxiety about the future is to revisit your financial plan regularly with your advisor.
Partner with Prime Capital Financial
At Prime Capital Financial, we understand the nuances of longevity risk and the challenges of planning for an unpredictable future. Our people-first organization has over 200 financial advisors in 70 locations nationwide. We’re a collaborative bunch, which means you get the experience and knowledge of our full team through your advisor relationship. Contact us today to take the first step toward a financially stable retirement.
Disclaimer: Advisory products and services offered by Investment Adviser Representatives through Prime Capital Investment Advisors, LLC (“PCIA”), a federally registered investment adviser. PCIA: 6201 College Blvd., Suite #150, Overland Park, KS 66211. PCIA is doing business as Prime Capital Financial | Wealth | Retirement | Wellness. PCIA and its associates do not provide legal or tax advice.
