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Retire Smart: Plan for Longevity

February 16, 2016

happy-retireesThere's more to retirement than just saving for it. Retirement is a brand-new chapter in your life that can open doors to new experiences and opportunities. To help you transition smoothly to this next stage, you need to look at the four L's of retirement: lifestyle, longevity, liquidity and legacy. We kicked off this series in January with an introduction to retirement lifestyle.

Today, we're zeroing in on longevity, or life expectancy. According to the recent longevity statistics from the Society of Actuaries, a 65-year-old man can expect to live another 21 to 22 years on average, while a 65-year-old woman can anticipate living another 23 to 24 years. What's more, 30% of those men and 40% of those women will live well into their 90s.

Because our life expectancy as a nation is increasing, it's vital that you factor a potentially long life into your retirement planning. Having an estimate on how long you may live can help you better plan your savings to ensure that your money lasts throughout your lifetime.

Longevity Issues

An increased life expectancy isn't the only factor you need to consider. There are other issues that can affect your retirement planning concerning longevity:

  • Inflation: Inflation can impact the value of your savings. It doesn't diminish the amount, but it decreases its purchasing power. Inflation can exhaust your budget easily if you don't plan for it. The value of your $150,000 annual net income in 2016 will not be the same in 2021. You may need to increase your budget for food and other cost-of-living expenses a few years down the line.Make sure you include inflation in your retirement planning.
  • Distribution rates: A distribution rate is the percentage you withdraw annually from your retirement account. The government requires that you start minimum distributions at the age of 70 ½. There is a popular rule of thumb stating that if you withdraw 4% of your retirement savings annually (adjusting that amount based on inflation), your nest egg will last for around 30 years. However, you need to evaluate if the 4% rule will apply to you or if you need to increase (or decrease) your withdrawals.

Longevity Solutions

While inflation and distribution rates are not entirely predictable, that is not to say that they can't be planned for. Two solutions to consider are:

  • Investments: Like anything, investments have pros and cons. One pro is that they are sustainable over a long retirement with average market returns. However, they don't offer longevity protection, which means they may require a lower spending rate. A combination of stocks, cash and bonds aligned with your risk tolerance is one of the optimal ways to approach investments.
  • Annuities: The great thing about an annuity is that it can provide you with guaranteed income. The contributions you make also grow tax-deferred. However, there are also disadvantages, such as the risk that the insurance company may not be able to meet its contractual guarantees. In addition, fees such as surrender charges can reduce your returns. One alternative is the increasingly popular no-load annuity, which cuts out the back-end fees of other annuity products.

Keeping longevity in consideration when saving is critical to a successful retirement, helping you anticipate future changes and plan for them. Discuss potential strategies with your financial planner to help you decide on the best course for your retirement.