Longevity Risks Impacting Retirement

Outliving Your Retirement Savings

Increasing longevity by most accounts is a good thing. People view it as an opportunity to live a “Second life” once retired. The idea of pursuing passions, helping with grandchildren, donating time and experience to favorite causes is very appealing. It certainly is not a “Problem” previous generations had to woory about. Consider this:

  • The average lifespan just 100 years ago was approximately 65 years old. 
  • Today, 1 in 4 will live past 90!  
  • Within 36 years there will be 4.2 million people over the age 100! 
  • Currently, there are 450,000 today over 100! 

Are you prepared financially for a 30+ year retirement? 

Certainly, we are living longer lives. But for many, that brings both happiness and apprehension as there is a significant risk that longevity could consume your retirement savings. 

Consequently, many financial professionals are sounding the alarm over longevity because longevity risk requires a much different approach for retirement planning.  For example, think about how you would pay for items imagine how much you would pay for items 30 years in the future? What would the following cost? (hint… you have to factor in inflation)

  • A vacation 
  • Gas, bread and milk
  • Dr. Visit
  • Medicine

The numbers don't lie

  • The fastest growing segment of the US population is 85+
  • By 2050, 4.5% of the population will be 85+
An Aging Nation: Projected Number of Children and Older Adults[Source: U.S. Census Bureau]

Example: Depleting Your Retirement Savings Earlier Than Anticipated

It’s pretty straightforward. If you live longer, you will need more money to keep the same standard of living. The problem is more around inflation and healthcare cost. The longer you live, the greater impact these two factors will have on your retirement income. With that in mind, you are fighting two battles. First, having enough money for your everyday expenses and lifestyle choices. Secondly, holding enough funds in reserve for almost certain healthcare expenses as you age. 

Example: More Retirees Than Workers Means Less Tax Revenue for Government

The imbalance of lower tax revenue from fewer workers contributing and more retirees receiving benefits is a looming societal problem that will most likely result in policy intervention in the future. At some point, this imbalance will have to be fixed. This means either higher taxes (which could impact you as a retiree ) and/or reduced retiree entitlements (i.e. Social Security and Medicare). 

Transfer Longevity Risk Using A Fixed Index Annuity to provide lifetime income

There are a couple of ways to transfer longevity risk.

  1. Deffer taking Social Security payments. This results in a larger lifetime payment which hedges against inflation.
  2. If offered, elect the annuity option versus lump sum from your employer when taking a pension benefit
  3. Life Insurance cash values can be transferred to fund an annuities (via IRS 1035 exchange) with no tax consequences 
  4. Purchase a retirement annuity that provides a guaranteed lifetime income stream for an individual or a couple 

Fixed index retirement annuities are one solution that provides for growth and protected lifetime income because they are fixed income financial products that do not expose you to financial risk.

Fixed index annuities offer:

  • Tax deferred growth 
  • Benefit of participating in market growth
  • Assurance of never losing money in down markets
  • Protected retirement income guaranteed for life – while maintaining liquidity of your assets
  • Income options that guarantee annual increases
  • Accelerated Benefit riders to cover chronic and terminal illnesses
  • Peace of mind…Never outliving your income!

For retirees concerned with outliving their assets, fixed index annuities are a popular solution

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Properly Planning For Longevity At Retirement Keeps More Money In Pocket

Example: Retire At 65

Bill and Sue are both 62 and are wanting to retire at 65.  They have a combined $800,000 saved between their two 401Ks. Bill and Sue have estimated their retirement expenses accounting for both “Essential” expenses and “Discretionary” expenses. However, both are very concerned about protecting their $800,000 and are afraid of market volatility when they retire. Likewise, they are also concerned about the healthcare costs as they age. Bill and Sue consider themselves very healthy and are active outdoor enthusiast. They enjoy life and are expect to be around a long time.

Bill and Sue determined they would need $50,000 annually to support their lifestyle.  

After checking with Social Security, they verified they would receive $27,000 per year (the 2018 average social security payment for a couple). This leaves a financial gap of $23,000 per year.

Bill and Sue have two options

  1.  Leave the $800,000 in the stock market and take withdrawals.  In this case, they would need to withdrawal approximately 3% annually. With inflation averaging 3% and administrative fees averaging 3%, they would need to consistently make 9% or better in the market to stay even. Also, if there were unexpected healthcare costs beyond medicare, for either one, they would have to pull savings directly from their principle. As bill and Sue want to avoid market volatility in retirement and be prepared for unexpected healthcare costs, this option is not appealing.
  2. Convert part or all of the $800,000 into a retirement annuity that would provide protection from market losses and guaranteed income for life. In fact, with the right products, their income could actually continue to grow in retirement. Additionally, the funds could be used to help pay for any chronic illnesses as they age.
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