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Are You Properly Planning for Longevity?

Andrew Ferrette, CFP®, MSBA

Director of Financial Education

Last Updated
September 06, 2022
Happy senior couple smiling cheerfully at a spa resort

5 Tips to Help Ensure You Don’t Outlive Your Assets

According to the U.S. Census Bureau, the number of people aged 90 and older has nearly tripled since 1980. Today, there are 1.9 million Americans over age 90, and that number is expected to increase to more than 7.6 million in the next 40 years.1 About one in every four 65-year-olds can expect to live past age 90, and one in 10 will live past age 95. Sadly, 14.5% of those 90 and older live in poverty, compared to only 9.6% of 65- to 89-year-olds.2

What does this mean? From a financial planning perspective, it highlights the importance of planning for longevity. Here are steps you can take today to avoid running out of money in the future.

#1 – Reframe retirement.  

For many older generations, “retirement” meant giving up work completely. With today’s longer life expectancies, however, an individual who retires at age 65 may live for 20 to 30 — or even 40 — years in retirement. That’s nearly as long as some people’s careers!

One of the best ways to ensure you don’t run out of assets in retirement is to continue working (in some capacity). This doesn’t mean extending your career another 10 years, but it may mean transitioning to a consultant, reducing the amount of days or hours in the office or finding a part-time job. While the financial benefits of continuing to work are obvious, there are several other advantages to working in retirement, such as:

  • Continued social/community connections
  • The potential for better or more affordable health insurance
  • Improved cognitive function
  • A sense of community and purpose
  • Overall health improvements

If you decide to continue working in your professional field or in a new environment, find a job doing something you love. Retirement can be a great opportunity to pursue the path not taken in your normal career, so take time to explore your options and pursue your interests.

#2 – Position your portfolio for growth.  

One common misconception among many soon-to-be retirees is that they should transfer all their riskier, growth-focused assets into conservative investments, such as CDs and bonds, as they near retirement. However, if you retire and move all your investments into short-term vehicles, you’re going to miss out on a lot of growth while also losing a significant amount of purchasing power to inflation over the next couple of decades. Look to allocate your portfolio in line with your retirement lifestyle and future goals, even those goals that are 20 plus years in the future. There’s risk in transitioning too much of your portfolio into conservative investments to support your short-term needs; this is longevity risk — the risk outliving your money.

At Creative Planning, we typically recommend maintaining three to five years of living expenses in a shorter-term, liquid investment account. This is generally a mix of bond funds that can provide capital for opportunistic rebalancing, capital for larger spending needs and a monthly income. Having a short-term allocation to bonds can prevent you from having to sell out of equities at a loss when markets are low.

Any assets not required to fund your short-term needs should be invested in a diversified portfolio with a focus on growth and inflation protection. While this portfolio should be in line with your overall risk tolerance and investment objectives, it should be invested in riskier assets than your short-term account. Throughout retirement, your wealth manager will help you identify opportune times to transfer assets from your long-term investments to your short-term savings in a tax-efficient manner.

#3 – Plan for healthcare expenses.  

Healthcare is one of the biggest expenses most people face in retirement. In fact, a 65-year-old couple that retired in 2021 can expect to spend approximately $300,000 on healthcare and medical expenses throughout retirement.3 That’s why it’s important to plan for healthcare expenses before you retire. 

One of the most tax-efficient ways to save for healthcare expenses in retirement is by contributing to a health savings account (HSA). HSAs offer three distinct tax advantages:

  • Because contributions are made with pre-tax dollars, they reduce your taxable income today.
  • HSA funds can be invested and grow tax-free in the account.
  • When used to pay for eligible medical expenses, HSA withdrawals are tax-free.

In addition, HSA contributions made via payroll deduction aren’t subject to Social Security and Medicare taxes, and, unlike with 401(k) plans, there are no required minimum distributions from the account. Also, because HSAs allow for investments in mutual funds (once certain asset levels are achieved), assets invested have the potential to grow over time and enhance your overall retirement savings.

As you near retirement, you may also want to consider purchasing a Medicare supplement plan to help pay for retirement healthcare expenses not covered by Medicare. There are many options for supplemental plans, and it’s important to make sure you have a clear understanding of your coverage, deductibles and out-of-pocket costs in order to choose a plan that meets your specific needs. Your wealth manager can help you evaluate your options to select a plan that’s right for you.

#4 – Establish a tax-efficient draw-down strategy.

The manner in which you draw from your various retirement accounts can have a big impact on how long your assets last in retirement. If your assets are spread across multiple account types, you may have the ability to optimize your retirement income by establishing a tax-efficient withdrawal strategy. Consider the tax status of the following account types as you develop that strategy.

  • Taxable (non-retirement) accounts – These accounts offer the benefit of lower dividend and capital gains tax rates as needed.
  • Tax-deferred retirement accounts, such as IRAs and 401(k)s – While allowing for tax-deferred growth, these accounts force ordinary income tax consequences whenever funds are withdrawn and will be subject to required minimum distributions (RMDs) beginning the year you turn 72.
  • Tax-exempt accounts, such as Roth IRAsThese accounts allow after-tax retirement savings to grow for as long as possible, and qualified withdrawals are tax-free.

In addition to the taxability of your investment accounts, your tax bracket, Social Security income and retirement goals are important considerations when establishing a retirement withdrawal strategy. Your wealth manager can help you to develop a custom draw-down strategy that meets your specific needs in a tax-efficient manner.

#5 – Have a plan in place.

The biggest key to successfully planning for longevity is to have a plan in place. Your comprehensive financial plan serves as a map toward accomplishing your goals and can help ensure you don’t outlive your assets in retirement. Your goals in retirement should serve as the driving force behind your overall investment, withdrawal and tax-planning strategies. A comprehensive financial plan incorporates all aspects of your financial life, including investment management, estate planning, tax planning, insurance planning, retirement income planning and more.

Are you worried about outliving your assets in retirement? Creative Planning is here to help. We can help you plan for the future by integrating all aspects of your personal financial life into a single, comprehensive plan designed to help you achieve your specific retirement goals. If you’d like help planning for an early retirement, or with any other financial matter, please schedule a call.

Footnotes:

  1. https://www.thoughtco.com/living-past-90-in-america-3321510
  2. https://www.census.gov/newsroom/releases/archives/aging_population/cb11-194.html
  3. https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs

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This commentary is provided for general information purposes only and should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.

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