Believe me, you are not alone if you have nervously asked yourself, your spouse or even a financial advisor: “will my retirement savings last as long as I do?” Concerns about running out of money in retirement are almost universal — no matter how much money you have. After all, there are many unknowable variables that can impact your retirement security — not least of which is not knowing how long you are going to live.
You might have enough to live comfortably or even luxuriously until age 85, but what happens if you luckily live to be 100?
The ole 1-2 punch — planning for two phases of retirement — may be your best defense against running out of money.
The good news? There are numerous strategies you can use to significantly reduce your risk of running out of money in old age.
Running out of money in retirement — does not mean that you are completely penniless? It really is more a question of “will my savings last?” Running out means you have used up all of your retirement savings and home equity and are left with whatever guaranteed income streams you might have (Social Security, an annuity or a pension if you are lucky).
Most people who run out of money in retirement continue to scrimp by — living on Social Security income and they have probably opted into Medicaid instead of Medicare.
Recent research from the World Economic Forum finds that most U.S. retirees will likely outlive their savings by around 8 to 10 years! The study assumes a life expectancy of age 85. Retirees who live longer than that could potentially spend even more time in retirement with no savings.
And, you are not necessarily safe if you are a high earner. According to a detailed report by the Employee Benefit Research Institute (EBRI), households with low income face a huge risk, but many wealthier households are also likely to run out of money.
- 83 percent of baby boomers in the lowest income quartile will run out of money in retirement
- 47 percent of boomers in the second lowest quartile will run out
- 28 percent of boomers in the second highest quartile will run out
- 13 percent of boomers in the highest income quartile will run out
Yikes! The above data refers to people who will be retired for 35 years. However, the information is only slightly better if you are living in retirement for 20 years — even then a full 81 percent of the lowest income quartile and 8 percent in the highest income quartile will run out of money.
There are multiple ways to make sure your retirement savings last as long as you do. One way is to use a phased approach to utilizing your savings.
Peter Tsui is the director of global research and design for S&P Dow Jones Indices. He suggests a method for handling longevity risk — you divide retirement into two phases and fund each phase separately:
Phase 1: The first phase lasts roughly from retirement age until age 85, which according to the Society of Actuaries, is close to the average life expectancy for someone who turns 65 years old in 2015. The actual average life expectancy is 87 — this means that you have at least a 50% chance of living longer than 87 (perhaps MUCH longer) and a 50% chance of living not as long.
Phase 2: The second phase is from 85 through the rest of your life — however long that might be.
To fund the second phase of retirement, Tsui recommends that at retirement you purchase a deferred lifetime annuity with income that will begin at age 85 and last until your death.
- A deferred lifetime annuity is simply an annuity that you buy now for income that will start at a predetermined future date. Lifetime annuities pay income for as long as you live — no matter how long that will be.
- The amount of income you will want to purchase will depend on the difference between any other guaranteed lifetime income sources like Social Security and the cost of your desired lifestyle at that time. However, be sure to also factor in healthcare costs which tend to increase as you get older.
Your remaining savings can be used for the first phase of retirement. Since the time period for using these assets is known, it is much easier to determine how much you can withdraw each year.
If you want to model this strategy in your own retirement plan, you can do so in the NewRetirement Retirement Planner.
- First research how much income your savings can buy. The annuity calculator let’s you estimate a deferred lifetime annuity. You will probably want to look carefully at the estimates to assess an annuity with inflation protection as well as spousal benefits if you are married.
- With this annuity information, you can run a scenario in the retirement planner against your current retirement plans and see if the 1-2 punch phased retirement strategy could strengthen your own answer to the all important question of “will my retirement savings last.”
There are numerous other ways to mitigate the risks of running out of money in retirement.
Big Savings: If you have a lot of money, you can often live off the dividends and interest earned on those assets but you need to make sure that you have the right allocations so that your money will both growth and be usable by you in the near term.
It is absolutely possible to have more savings at the end of your retirement than when you started. Here are 8 tips for this kind of financial success.
Bucket Approach: Tsui’s two phase approach is essentially a bucket strategy — allocating different buckets of money in different investments or for different purposes. There are many other ways of bucketing your money for retirement. Explore other bucket strategies and their pros and cons.
Using Home Equity as a Fall Back: Some homeowners plan to make their retirement savings last as long as possible and then downsize or get a reverse mortgage to make ends meet thereafter. This can be a viable approach, but you may want to explore cashing in on the home in advance of when you actually need it.
Try to Pinpoint Your Longevity: Some people try to get a particularly good estimate of their longevity and plan their retirement finances around that particular number. There are quite a few life expectancy quizzes that can help you, but they have not yet been proven to be scientifically accurate.
Try any of these scenarios in the Retirement planner and see what gives you peace of mind.
We at NewRetirement think that you will do a better job transitioning to retirement if you have a solid understanding of what you have and what you will need and if you have explored various options for making it all work.
The NewRetirement Retirement Planner is a highly detailed planning tool that let’s you model the best time to start Social Security, how you might be able to use home equity, how you might pay for long term care and much more — including trying what if scenarios with various investment accounts.
Best of all, this tool lets you set different spending levels for any time period you can imagine. Rethinking your retirement budget can dramatically lower how much you need overall and make you feel better about your retirement prospects. The planning system was named
If you can create a clear picture of your future, then you can get there.
