Key takeaways
- A longer life span requires planning for a longer retirement.
- Start saving early.
- Consider supplementing income later on.
Living to triple digits used to be worthy of attention—and yogurt commercials. Not so much anymore. Today some 70,000 centenarians live in the U.S., according to the Centers for Disease Control and Prevention. Indeed, since 2000, America's 100-and-over crowd has ballooned by 44%.
Of course, many people welcome the chance for a long life—if it's accompanied by good health and mental acuity. But that prospect prompts another "if": Will your finances stand the test of time?
To answer that question, you need to consider a range of possibilities. But first, some perspective:
We're living longer
Gone are the days when Ben Franklin was the only octogenarian on the block. American girls born this year can expect to live past 81 on average, while the average newborn boy will surpass 76, the CDC reports. Meanwhile, 65-year-old women are likely to live another 21 years, while men at 65 are likely to hit 83. And the American Medical Association says the numbers are even higher for those with good educations and higher-than-average incomes.
But longer life brings extra risk, and traditional retirement planning may not meet the challenge. For one, you might not be able to accumulate enough money to support a retirement that lasts 30 or even 40 years.
Health care can be particularly unpredictable. A 65-year old couple retiring today can expect to pay $377,412 for medical care not covered by Medicare, according to HealthView Services. What's more, costs are rising at twice the rate of inflation.
A new saving strategy
Today's trends make a good case for turbocharging your savings. An early start gives your retirement savings time to grow and compound. A workplace plan is a convenient option, and lets you take advantage of a match if your employer offers one.
Also pay attention to your asset allocation—the mix of stocks, bonds and other investments you hold. The traditional rule is to subtract your age from 100 to arrive at the right proportion of equities, or stocks, for your portfolio. In that scenario, a 35-year-old may want to consider allocating 65% of their money to equities and 35% to bonds. Trouble is, these days that might risk having a portfolio that won't grow enough to last your whole life.
So you might want to consider new math: Subtract your age from 110 or even 120 to determine how much stock allocation could be appropriate for you. Sprinkling in alternative investments such as commodities and real estate may also help your portfolio outpace inflation, which eats away at your spending power.
Investing involves risk and it is possible to lose money. Some investments are riskier than others so when developing an investment strategy, you need to consider a variety of factors such as your goals, time horizon, and risk tolerance.
A new working model
Saving and investing are important, but to set yourself up for a longer life, you may need to work longer. Putting in more hours can have a big impact. According to Boston College's Center for Retirement Research, working just four years past age 62 can boost retirement income by a third.
The reasons: The longer you work, the more you can keep saving, delay tapping your retirement assets, and delay taking Social Security benefits. When you do start using your nest egg, you'll have fewer years to fund, so your money can last longer.
What's more, by holding off on Social Security, you can boost the size of your monthly check—for life. That's because if you start taking your benefit when you first become eligible at 62, the amount is cut by about 8 percent for each year before your “full" retirement age (now 67 for most workers). But if you wait until full retirement, you'll get your full benefit. And if you put it off longer, you'll get a lifetime bonus for each month you wait until age 70.
Even so, finding employment in your 60s and 70s may be tougher than you think. A study by the AARP found that ageism at work is all too real. So it's important to nurture your career and keep your skills up to date, in order to remain relevant in the workplace.
Creating income during retirement
Even though it's adjusted for inflation each year, Social Security makes up only about 40% of the average worker's retirement income. The rest has to come from somewhere else. No wonder financial planners say their clients' key concern is running out of money in retirement.
This is where guaranteed annuities may play a role. (All guarantees are backed by the claims-paying ability of the issuing company.) Two types are deferred and immediate. Deferred annuities let you accumulate money while saving for retirement, with payouts that begin years later; with immediate annuities, you invest a lump sum in exchange for an income stream that starts right away.
Annuities contain exclusions, limitations, reductions of benefits, and terms for keeping them in force. You should speak with a licensed financial professional who can provide you with complete details if you are considering an annuity.
They may not be the perfect solution for longevity, but they may help provide income during retirement.
What you can do next
Longer life spans call for a new look at your retirement saving strategy, with an eye on creative solutions, a focus on growth, and a thought toward guaranteed income. Nurturing your career with learning could help fatten your nest egg, and staying active and healthy can help you avoid costly medical care.
Ilana Polyak is a freelance writer who specializes in personal finance and the financial advisory industry. Her work has appeared in The New York Times, Barron's, Kiplinger's Personal Finance, Bloomberg BusinessWeek, and CNBC.com.
1072407-00001-00
