Let’s suppose that you — or your spouse or partner — live to age 100. Will your money last that long? You don’t want to experience “money death” before leaving this planet for good. Even if you don’t live to be 100, it’s smart to make sure your retirement income will last a long time, because there’s a good chance you’ll make it to your 90s.
If you’re currently in your 60s, it’ll take a lot of money to be fully retired for 30 years or more. Let’s just do one simple reality check to illustrate. Suppose you spend $50,000 per year on all your living expenses — housing, food, utilities, medical premiums, medical expenses, entertainment and so on. This isn’t a bad assumption, given that the average American household spent $51,442 per year on these expenses in 2012, according to the Consumer Expenditure Survey. If you live 30 years, that’s $1.5 million, and we haven’t even factored in inflation, which is sure to increase your living expenses.
Do your IRAs and 401(k) accounts total $1.5 million?
The good news is, they don’t have to. You have other sources you can also count on, such as Social Security, employment income or an employer-sponsored pension, if one is coming to you. But you’ll still want to plan your finances carefully to make sure you’ll have enough to cover your living expenses until age 100 and beyond.
You’ll want to maximize the sources of retirement income that are paid for the rest of your life, no matter how long you live. That means delaying Social Security benefits until age 70, the age at which you will have maxed out the delayed retirement credits.
If you’re eligible for a traditional pension that pays you a monthly income for the rest of your life, you’ll also want to wait until the normal retirement age, typically age 65, to start benefits. At that age, there’s no longer a reduction taken for early retirement. If your employer attempts to seduce you with the offer of a lump sum payment in lieu of the monthly pension, turn it down — you’ll get more money over your lifetime by taking the monthly pension.
One good retirement strategy is to cover your basic living expenses with sources of income that are guaranteed for life and indexed for inflation. This way, you don’t need to worry about the roof over your head and food on the table if you live a long time or inflation kicks in.
Social Security is a good source of such income, which is one valid reason to wait until age 70 to start benefits. Another good source is an immediate annuity that’s indexed for inflation or that increases at a fixed rate, such as three percent per year. You can use your retirement savings to buy such an annuity.
Note: Employer-sponsored pension plans aren’t indexed for inflation, so they don’t fit the parameters of this retirement strategy, but they’re still a valuable benefit because they’re paid as long as you live.
For your discretionary living expenses, such as travel and entertainment, it’s not quite as critical that your retirement income lasts for life or is indexed for inflation. For these expenses, you might consider investing your remaining savings in stocks with the potential for growth. Then you can make periodic withdrawals, either with a systematic withdrawal method or as needed, to cover these type of expenses.
The possibility of living to age 100 is another reason it’s a good idea to work until your 70s. This lets you wait to start Social Security benefits, and by working longer, you’ll need less retirement savings.
For example, suppose you need an annual retirement income of $20,000 to supplement your Social Security income. If you purchase an immediate lifetime annuity that increases at three percent per year, according to Income Solutions, a 65-year-old couple would need about $461,000 in savings, but a 75-year-old couple would need only $349,000. Plus, if you waited from age 65 to 75, you’d have 10 more years for your savings to grow.
If you don’t want to buy an immediate annuity to generate $20,000 per year, then you’ll need more savings. The so-called “four percent rule” is intended to use invested savings to generate retirement income for 30 years, which gets a 65 year-old only to age 95. The four percent rule would require savings equal to about $500,000 to generate an annual retirement income of $20,000. And lately, the four percent rule has been called into question as delivering a retirement income that may be too high, given the low level of interest rates and the drag of fees for investment and advisor expenses.
The bottom line is that if you expect to live to your mid-90s or even age 100, buying a lifetime annuity with some portion of your savings is a good idea.
Finally, you’ll want to have a strategy for paying for medical and long-term care expenses. You can remove most of the uncertainty and exposure for high medical expenses through participating in Medicare and buying the appropriate Medicare supplement plan.
Medicare and medical insurance, however, don’t typically cover long-term care expenses. In this case, you’ll either want to buy long-term care insurance, keep your home equity in reserve to tap in case you need long-term care, keep an investment account that’s dedicated to long-term care expenses, or — more likely — some combination of these strategies.
The bottom line is, it will take some careful planning to support yourself and your spouse or partner until age 100. You’ll want to consider working as long as you can, saving as much as you can, carefully managing your living expenses and creating a fulfilling and engaging life that makes it all worthwhile.
For more than 35 years, consulting actuary Steve Vernon helped large employers design and manage their retirement programs. Now he’s a Research Scholar for the Stanford Center on Longevity, where he helps collect, direct, and disseminate research that will improve the financial security of seniors. He also delivers retirement planning workshops and has authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.