Does it seem impossible to think you could live to 100? The Society of Actuaries has a really clever longevity calculator (at www.longevityillustrator.org) that tells me that a 55-year-old woman in excellent health has a 16% chance of living to age 100, and a 62-year-old male has an 8% chance. Or how about living to age 95? The 55-year-old woman has a 34% chance and the 62-year-old male has a 23% chance. Those are pretty good odds that you need to make sure retirement money will last as long as you do!
Here are 4 smart financial strategies that can withstand the test of time:
Plan to work at least until your Social Security Full Retirement Age, which is between age 66 and age 67 for today’s retirees. While you may be itching to turn off that alarm clock and retire early, at age 62, you’re taking a 25% to 30% pay cut from your full SS benefit. And keep in mind that annual Cost of Living Adjustments are based off of your benefit amount. So a smaller beginning SS benefit translates to smaller COLA’s too…for your lifetime.
Even better, try to wait a few years past your Full Retirement Age, and the SS Administration will reward you with an 8% guaranteed annual increase in your benefit for each year you wait until age 70. For example, waiting the 4 years from age 66 to 70 increases your benefit by 32%, or a third higher!
The most common arguments I hear against waiting to take SS is (1) what if I die young and I miss out on getting “my money” out of SS and (2) what if the SS administration runs out of money? Here’s my response to those arguments: (1) well, if you die young it’s really a moot point to you anyway, right? 😊 But what if you DO live a long time – say to age 95 or 100 – and you’ve crippled your retirement years by taking that lower age 62 benefit? Numbers don’t lie, and they say that if you think you’ll live past your very early 80’s – ie. Age 81 – then you’re always better to wait to take SS and get a bigger benefit. To the second argument I say that there is NO way that retirees could sustain their lifestyle as they know it, if SS is allowed to collapse. According to the National Institute on Retirement Security, a full 40% of retirees rely solely on SS for their income (including people over age 60 who are also receiving SS Disability). This just points to the fact that, as a society, we could never let this all-important social safety net collapse and push an entire segment of retirees into total poverty. SS will be around for your lifetime – I’m confident of that – and it’s important to maximize this income stream for you, and your spouse if you’re married.
To sum up, then, don’t take your SS too early!
Have at least 2/3 of your retirement income generated from guaranteed sources that you cannot outlive. This could be some combination of Social Security, employer pensions or income annuities. The reason is not just financial in nature, it also speaks to retiree’s levels of happiness. A study done by the LIMRA Secure Retirement Institute in 2018 found that 73% of respondents who had a high level of guaranteed income were more confident in maintaining their lifestyle and not outliving their money than those who relied solely on the markets and Social Security. Makes sense to me – no one likes to worry their way through retirement, and if a significant portion of your income is dependent on the performance of something you have absolutely no control over (such as stock market returns) that would surely create a higher stress level. If you’re one of the lucky ones that have an employer pension to add to their SS income, that’s a definite plus! You should be well set to have a secure, well-lived retirement. If you don’t have an employer pension, don’t fret. You can create one of your own by reallocating a portion of your 401k or IRA to a highly-rated insurance company that will pay you a guaranteed lifetime annuity payout, for you AND your spouse.
If you’re someone who says “Ooh wait, I don’t like annuities”, then I’ll gently ask you how much you enjoy getting your SS check each month? Because SS is the biggest annuity example there is: you paid into the pot of money and now they’re paying you back for your lifetime, guaranteed. I do agree that some annuities are better than others – whether through fees, or payout factors – so it pays to have a professional do some homework and find the right fit for you.
But again, have 2/3 of your income from guaranteed sources, and you’ll be happier for it.
Don’t ignore long-term care planning. If your strategy is to look the other way and not think about it, I encourage you to reconsider. According to an AgeWave study, only 37% of people age 50+ thought they would need long term care during their lifetime, but the reality is that 70% will. So think about that: out of 10 people you know, including yourself and your spouse, 7 of them will need some type of care. Medicare does NOT cover this type of (expensive) care except in little bits and pieces. Know that long term care can include in-home care and assisted living, as well as full-skilled care, that can cost upwards of $4,000 to $7,500/month in today’s dollars. We cannot, in good conscience, do our older selves a disservice by ignoring it. If you have the assets to self-insure, that’s great - but if they’re all in an IRA, you have to pay tax on those withdrawals, so you just added about a 25% to 32% tax cost to your LTC costs. Whew.
I’m a fan of long term care planning, especially the “asset-based” LTC insurance that is very much an investment you own. It provides an enhanced pool of TAX-FREE LTC dollars for everything from home health through full-skilled care and has a death benefit that pays your heirs back if you never need it. It’s a game-changer for peace of mind in retirement. And hey, it gives you the freedom to spend your other retirement money on the fun stuff in life, not saving it for “just in case” healthcare costs.
To sum up: long term care planning– don’t ignore it. It’s in the back of your mind if we’re honest, so let’s tackle it head on.
Your investment strategy should be segmented by time and purpose, not by type of account. What do I mean by that? It’s not uncommon that new clients I meet will come in carrying their statements and I see that their IRA’s are invested one way and their brokerage accounts another. Or perhaps they’re retired and have ALL of their accounts clamped down in a conservative investment strategy. But to make sure your money lasts as long as you do, you need to think long-term…very long-term. Bucket segmenting is an easy way to do that:
o A NOW bucket has your bank accounts in it: safe, rainy-day money, that everyone needs. No risk, but no reward either. That’s ok – gotta have it.
o A SOON bucket has accounts that you’ll access for income in Phase 1 of retirement, roughly 8 to 10 years. This may be a brokerage account and/or an IRA from which you’ll draw your Required Minimum Distributions. These accounts are invested more conservatively to make their stock market ride a kiddie roller coaster, with gentle up’s and down’s. This creates the income bridge to your LATER bucket.
o A LATER bucket has the rest of your accounts, not otherwise identified as NOW or SOON. These accounts are reserved for Phase 2 of retirement, roughly 10+ years out. They can have a stronger growth orientation, and their stock market ride can be an adult-sized roller coaster, knowing they have the magic word “time” to stay invested in the markets. Using the Rules of 72, LATER bucket accounts that earn an average of 7%/year will double every 10 years. So as these accounts grow, a portion of them will be poured back into the Soon bucket to refill those conservative accounts as income withdrawals slowly deplete them.
This strategy is repeatable over and over again, through-out your long-lived retirement years, and is designed to both reward you with growth in the LATER bucket while giving you confidence and security in the SOON bucket. It’s deceptively simple, but quite effective.
There you have it. 4 financial planning strategies to live confidently and fearlessly to age 100. Go forth and conquer!
About Yvonne Marsh, CFP®, CPA, Financial Planner
Most people want to feel assured that even if they live to be 100, their health and health care costs won't end their independence. Yvonne helps create a strategy that incorporates investments, long-term care, insurance, Social Security, and legal considerations so that her clients feel confident that they have the freedom to maintain their independence even if their health declines.