Outliving Your Savings: Preparing For The Financial Risks Of Living A Longer Life

You’ve probably thought about, or even sat down with a financial advisor to plan for, what would happen in the event your life ends sooner than expected. But have you ever thought about what would happen to you and your family if you live much longer than anticipated?

As people today increasingly lead longer lives, longevity risk (or the risk of outliving one’s assets) is something many individuals nearing retirement age definitely need to consider. It sounds strange to think about, but it’s important to ask: What can I do to make sure my money lives as long as I do?

Gender, Education & Income All Factor Into How Long You Will Live

It used to be knowing someone who made it to 100 years old was a true rarity. Today, while it’s still pretty rare, it’s definitely more commonplace. According to the CDC, the number of American centenarians jumped from just over 50,000 in 2000 to more than 72,000 in 2014. That’s an increase of 43% in only 14 years!

Still, the majority of Americans aren’t quite making it to the century mark just yet. According to this article from ThinkAdvisor, after a person hits age 65 the average life expectancy in the U.S. is 84 years. The article lays out nine factors that can determine the likelihood that a person will exceed that life expectancy. They include:

  • Gender – Sorry, men, on average, women live longer.
  • Education – Higher education levels are linked to longer lifespans.
  • Marriage – Married people tend to have lower mortality rates.
  • Lifestyle – Not surprisingly, diet, exercise, tobacco use, and other behaviors can all influence how long we live.

Other key factors also play a role in life expectancy. Perhaps most notably—how much money you have. This Vox article looks at some data showing increasing inequality in life expectancy between individuals with higher income levels and those with lower income levels. The article even includes a pair of charts breaking down life expectancy for both men and women at four different income levels in all 50 states. Take a look and see where you fall on the expectancy spectrum.

Why Managing Longevity Risk Is Particularly Important for Wealthy Individuals

It makes logical sense that wealthier individuals today tend to have a longer life expectancy. Most wealthy individuals have access to better healthcare, money to eat better, means to take better care of themselves, etc. Of course, that’s also a key reason why longevity risk is more acute for the nation’s top wealth holders. 

Along with having a better chance of living longer, wealthier individuals also typically have more expensive lifestyles to maintain. If you need to maintain that kind of lifestyle for 10 years (or more) longer than your financial plan allows, that’s quite a bit of exposure. You may think, “I’ll go by the rule of 4%, live to be 85 years old, and I should have plenty”. But maybe because of your income, health, education, etc., you’re actually more likely to live into your 90s now. If that’s the reality, do you have the right strategy to protect against financial risks?

Three Things to Consider When It Comes to Lifetime Income Planning

In this day and age where fewer and fewer people have pensions, it really comes down to planning for income streams. This is the new challenge facing today’s retirees.

Basically, you’ve got social security—which, if your income is pretty high, probably makes up a relatively small portion of your retirement income—and you’ve got your investment portfolio. If you’re going to maintain the lifestyle you had pre-retirement, what you have to do is figure out how to take that asset value and determine the appropriate amount of risk while still getting enough return to make it last a lifetime.

There are different ways you can do this. The best place to start is to talk to a trusted financial advisor. In the meantime, here are a few key things to consider:

1. Be Wary of Outdated Estimates

When you did your financial planning years ago, odds are you used some type of “retirement calculator” to figure out how much money you needed to save. Well, these numbers may not be accurate anymore. In fact, they could be off by 8-10 years—leaving you like 40% of U.S. households today projected to run short of money in retirement.

Another financial “rule of thumb” that might not be steering you in the best direction is the 4% rule. This guideline suggests that in retirement you can withdraw 4% of your portfolio each year to last you a lifetime. In recent years, there’s been some questions about whether 4% is still a valid number given how low interest rates are these days.

2. Revisit Your 401k 

A lot of 401k plan sponsors choose “target date funds” as a default. These are funds where the investments become more conservative as individuals age. The problem with these funds is that they make a lot more sense if you’re living to 75 than if you’re living to 90. For people who are living longer, target date funds become overly conversative too soon and don’t compound your income the way you need them to later in life.

If we’re all going to live longer, all those target date funds we were encouraged to buy aren’t working the way we think they are. If your 401k plan currently includes target base funds, it may be worth talking to your financial advisor about your other options because you may be doing your family or, if you’re a business owner, your employees, a disservice.

3. Do More with Less

Another way you can prepare financially to live a longer life is to do more with less. This might mean allocating your resources in a different way. For example, it could make sense to do something that gives you more money to live but doesn’t have as much legacy potential—like an immediate annuity. With this option you’re probably going to get the highest return on principal if you live a long time, but there won’t be anything left when you pass away.

You can also take a bucketing approach, where you say how much will I need to support my income and then how much can I put toward legacy. That’s the whole idea of developing a comprehensive financial plan. You can do more with less if you’re really targeted in your approach and you plan ahead.

It’s Better to Have a Plan and Not Need It Than to Need a Plan and Not Have It

When it comes to financial planning, people tend to spend a lot more time thinking about what will happen if they leave this world unexpectedly than if they live a long, healthy life. Make sure you’re prepared for both scenarios. Even if you think you’ve got more than enough to lead the lifestyle you want into your 100th year, it never hurts to take another look.

Need help creating a financial strategy to ensure your money will live as long as you do? Schedule a consultation with Trove Private Wealth™ today.

The information provided has been derived from sources believed to be reliable, but is not guaranteed as to accuracy and does not purport to be complete analysis of the material discussed, nor does it constitute an offer or a solicitation of an offer to buy any securities, products or services mentioned.



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