As healthcare advances extend the average life span, worries about outliving assets loom
Do you expect your retirement will be as financially secure as your parents’ retirement? According to Alicia Munnell, director of the Center for Retirement Research at Boston College, current retirees are living in a retirement “golden age” that Boomers and Generation Xers will have great difficulty replicating. As Munnell notes, Boomers will battle for prosperity in their golden years due to the fact that at the same time longevity is increasing, retirement incomes are less stable and out of pocket healthcare costs are increasing.
In honor of “Older Americans Month” in May, the U.S. Census Bureau released some very interesting facts and figures relating to longevity that underscore the severity of the crisis that could develop from the imbalance between increasingly long retirements and depleted nest eggs. For example:
In 2009, there were 39.6 million Americans 65 and older, equaling about 13 percent of the population. By 2050, there will be 88.5 million people older than 65, totaling 20 percent of the total population. Of that group, it is estimated 601,000 will be 100 and older.
In 2009, the median annual income of households headed by people 65 and older was $31,354, roughly $19,000 lower than the median for all households.
According to the Department of Labor, there were 6.5 million people 65 and older in the labor force in 2009. The Department of Labor projects that by 2018, more than 11.1 million people older than 65 will be on the job, with about half of them working full time.
Additionally, “Generation Ageless: Longevity and the Boomers,” a recent roundtable discussion at Stanford University hosted by Tom Brokaw, noted that during the 20th century, life expectancy grew by nearly three decades and that we are fast approaching a time when older adults will outnumber children for the first time in our country’s history.
With longer life expectancies than men, women are particularly susceptible to outliving their assets. According to statistics gathered by AARP, the number of households headed by single women over age 75 is projected to grow from fewer than 6 million in 2010 to 13 million by 2050. Because for many of these widowed women, the death of their spouse will mean a decline in standard of living, we need to plan for how sources of income might change when a spouse dies. For example, couples need to plan for the fact that a spouse’s pension is often reduced by half after their spouse dies. Also, if the couple receives Social Security benefits based on each of their work histories, the survivor gets only the higher benefit, not both benefits after the death of a spouse.
In many instances, the challenges Boomers will face will stem not from a lack of retirement funds, but from the absence of a concrete plan for distributing retirement income. Accordingly, as you transition from the accumulation to the distribution phase of your life, working with a trusted financial advisor to answer these questions can help you to enjoy a secure retirement and ensure that you don’t outlive your assets:
- How can I protect my portfolio from inflation? For most investors, the biggest threat to a financially secure retirement is not short-term market volatility, but inflation. Consider this: Even if inflation stays at the historical level of 3 percent, the cost of almost everything will double in 24 years. That means if you are living on $80,000 in 2011, by 2035, you’ll need $160,000 to maintain your standard of living. Accordingly, as we plan for retirements to span greater than three decades, it’s clear that portfolios comprised solely of bonds and cash will not protect against inflation. Today, the increased length of retirement requires an allocation to global equities for growth potential and diversification.
- How much can I safely withdraw each year? It’s important to set a portfolio withdrawal rate that does not deplete your assets too quickly. It’s a generally acknowledged rule of thumb that retirees can withdraw 4 percent each year from savings to cover retirement living expenses, and be reasonably assured that they won’t run out of money. However, that percentage by no means applies to all situations. Changes to your retirement lifestyle, market returns, and inflation rates can all influence what’s reasonable and sustainable. In fact, a recent study by Christopher O’Flinn and Felix Schirripa, Revisiting Retirement Withdrawal Plans and Their Historical Rates of Return, examined the four percent rule and found a possible risk of depleting assets driven mostly by high inflation and equity market drops.
- Which account do I draw from first? With tax-deferred accounts such as IRAs or 401(k) plans, taxable investment accounts, and annuities, choosing the account you use first to meet your retirement income needs is an important decision. Looking at distribution with a multi-year lens can help minimize taxes and maximize asset growth. Remember, if you’re aged 70½ or older, your qualified retirement accounts (like traditional IRAs and 401(k)s) are subject to IRS-mandated required minimum distributions (RMDs).
- How often should I re-balance? Income draw-downs and market swings impact your overall asset allocation, so we regularly review your total portfolio and rebalance if necessary to maintain a mix of stocks, bonds, and cash that is appropriate for your age and risk tolerance.
- Do I need more insurance? You’re accustomed to managing market and inflation risk, but retirement adds longevity and healthcare costs to the equation. If you’re worried about running out of money later in life, you might consider converting a portion of your savings into a regular stream of income payments by purchasing a lifetime income annuity. If the cost of long-term care is a worry, you could consider purchasing long-term care insurance.
In conclusion, as longevity continues to increase, there’s a strong possibility you could spend just as much time in retirement as you did in the workforce. Interestingly, however, longevity is something individuals tend to under estimate. For example, according to a 2010 study by the Society of Actuaries, 67 percent of retirees and 61 percent of pre-retirees underestimate average life expectancy, based on their current age. My job as my clients’ trusted advisor is to address the above questions and ensure that their portfolio is positioned so they can enjoy their golden years to the fullest. That requires not only constant monitoring today’s asset allocation, but an ongoing commitment to re-evaluate their situation as markets and circumstances change to ensure that their future income stream remains secure throughout their retirement, no matter how long it lasts.