Perspectives

Planning for a Long Retirement – Part 1

The effect of rising prices combined with increasing lifespans exposes you to the chance of outliving your savings.  Here are ways to prepare.

The primary goal of a retirement investment and income strategy is to ensure that your savings last throughout retirement. Achieving that all-important objective includes addressing two critical risks: longevity and inflation. American life expectancy is higher than ever and is likely to continue rising. Living longer not only requires you to continue spending over a greater number of years but also further exposes you to increases in prices for goods and services. For a retirement that may last well into your 90s, inflation may ultimately become more of a concern than market volatility. “Longevity has transformed the model for how people should save and invest for retirement,” says Christine Fahlund, CFP®, a senior financial planner at T.Rowe Price. “We now have to prepare for a post-work life that could last three decades or more.”

Longevity Risk

According to the Society of Actuaries, there is a 50% chance that one partner in a couple will live to age 92, and a 20% chance that one will live to age 98.* Those chances are likely to improve if current aging trends hold. “To be prepared,” notes Fahlund, “it’s important to have a realistic spending plan and consider ways to maximize the withdrawal amounts you receive from your investments, Social Security, and possibly continued employment.”

1 Practice Retirement®: Keep working but start playing sooner.

The traditional view of retirement divides your life into two clearly defined stages: working followed by playing. Retirement, however, has evolved—and along with it the expectation that you must receive your gold watch before you are “allowed” to start playing. Fahlund believes that in your early 60s you can begin enjoying the lifestyle you see for yourself in retirement as long as you remain employed into your late 60s. “If you envision traveling to India when you’re retired,” she says, “consider the option of going there on vacation when you’re age 63 and still employed. Why wait?”Fahlund points to a number of advantages that come with staying at your job longer. “By carving out time to travel or indulge in a hobby while you are still working,” she says, “you will be able to benefit financially from additional years of salary and benefits, and you will be able to capitalize on the opportunities during this vibrant phase of your life.”

2 Spend from your wages, not your savings.

You are likely to have more to spend by remaining at your job than you would by retiring and relying on your savings to pay for the activities you want to enjoy. The longer you remain employed, the more time your current investments and savings will have to potentially grow and the fewer years you may need to support yourself from your investments in retirement.

3 Receive employee benefits longer.

Capitalize on the benefits your employer may offer—such as health and life insurance and matching contributions to a retirement plan. Remember that Medicare does not begin until you reach age 65. Retiring earlier may mean you have to pay significant health insurance premiums each year until you reach that age when you will be at least partially covered by Medicare.

4. Delay taking RMDs.

Taking required minimum distributions (RMDs) from the retirement account you have with your current employer can be delayed if you are still employed there at age 70½ (certain restrictions apply). The IRS rule states that you must begin taking RMDs by the later of either April 1 of the year after you reach age 70½ or April 1 of the year after the year you retire from the company. (RMDs from all other prior employer retirement accounts and all IRAs, except Roth IRAs, must begin for  the year you reach age 70½, regardless of your employment status.)Fahlund adds that you don’t necessarily have to work full-time in your 60s to enjoy the benefits of additional income. A part-time paycheck will reduce the amount you need to withdraw from savings, even if it adds up to only a few thousand dollars a year. “The more expenses that can be covered by wages, rather than investments, the better,” Fahlund says. “Little steps like this can, over a long retirement, really make a difference in your likelihood of not running out of money.”

5. Delay Social Security benefits.

You are eligible to begin receiving Social Security benefits once you turn age 62. However, your starting benefits will increase approximately 7% to 8% every year you delay taking them from age 62 up to age 70, plus adjustments for inflation. By waiting until age 70, your benefit payment would have almost twice the purchasing power of what you would have received if you had started them at age 62. “The majority of retirees,” says Fahlund, “will come out ahead by delaying taking their payments for even a year or two.”

*Society of Actuaries and the National Association of Personal Financial Advisors (NAPFA), 2011.