5 Steps to Help Ensure You Don’t Outlive Your Retirement Savings
We all hope for the opportunity to live long, healthy lives, and with advances in healthcare, the average life expectancy has risen over the last few decades.1 While this is great news for our quality of life, it presents challenges when planning for retirement.
Recent research shows that the biggest concern among those saving for retirement is the possibility of outliving their assets.2 Referred to as longevity risk, the possibility of running out of assets in retirement increases alongside life expectancy, which is why it’s important to take steps to help ensure you don’t outlive your assets. The following tips can help you prepare.
#1 – Have a plan in place.
One of the best ways to help ensure you don’t run out of money in retirement is to have a financial plan in place. A financial plan provides you with a personalized road map to help guide your saving, spending and investment decisions throughout your working years and into retirement. It takes into account your specific retirement goals and spending requirements and addresses the unique challenges you face. A comprehensive financial plan puts you in control of all aspects of your financial life and can help you identify specific actions to help keep your finances on track as your life and situation evolve over time.
#2 – Consider delaying Social Security.
Waiting until age 70 to begin receiving Social Security benefits can provide you with an additional 8% each month, adjusted for inflation. While it takes time for the increased monthly benefit amount to make up for the years you delayed receiving benefits, most retirees break even in their early to mid-80s.
The following chart illustrates the potential benefits of delaying Social Security. Based on the assumptions below, a high-earning 65-year-old could potentially unlock $450,542 in additional Social Security benefits by delaying benefits from age 67 to age 70 ($3,809,481 – $3,358,939 = $450,542).
Social Security total lifetime benefits at age 100
Source: https://privatebank.jpmorgan.com/nam/en/insights/markets-and-investing/ideas-and-insights/the-new-longevity-financial-planning-for-a-longer-life. For illustrative purposes only, J.P. Morgan Private Bank as of April 1, 2024.
This chart illustrates the dollar difference in lifetime Social Security benefits (in today’s dollars) for a high earning 65-year-old couple claiming at full retirement age and age 70. The Social Security primary insurance amount is based on maximum average indexed monthly earnings, the primary insurance amount is adjusted by delaying claiming and benefits are adjusted by a COLA estimate that’s assumed to be the same inflation estimate as that in capital market assumptions. In today’s dollars, the value of social benefits for a high-earning couple claiming at full retirement age and expecting to live until age 100 would be $3,358,939. By waiting to claim at age 70, the value of those same Social Security benefits grows to $3,809,481.
Waiting until age 70 to claim Social Security benefits also acts as a form of insurance for your financial plan. Typically, most financial plans are stressed when one or more of the following occurs: 1) living considerably longer than expected, 2) inflation is higher than expected for long periods or 3) investment returns are far lower than expected. However, delaying Social Security benefits until age 70 would help offset each of these risks.
#3 – Strategically allocate your investments.
Many retirees mistakenly believe their assets should be invested in a conservative manner as they head into retirement. While it may seem wise to protect your retirement assets from future market volatility, maintaining an asset allocation that’s too conservative can actually place you at greater risk for outliving those assets. You could end up living in retirement for 20 to 30 years — or even longer. You’ll need your assets to continue growing during that time to keep up with inflation and your daily living expenses.
In order to continue growing your assets at an appropriate rate, it’s important to maintain a diversified investment portfolio. While stocks are typically more volatile than bonds, they offer the potential for portfolio growth, which is vital in helping your retirement savings keep up with inflation. On the flip side, an allocation to bonds and other conservative investments can help protect your assets during periods of market volatility.
At Creative Planning, we typically recommend our clients have five to seven years of living expenses invested in safer assets, such as bonds. This way when the markets are down, one has the ability to withdraw from less volatile investments without being forced to sell stocks at inopportune times. Once the markets have rebounded, they can sell some stocks at a profit to replenish their bond portfolio and prepare for the next bear market.
This approach helps one avoid the mistake of selling low and buying high as they continue to grow their assets for the long term, while also protecting the money they need to cover their day-to-day retirement expenses.
#4 – Plan for healthcare expenses.
Did you know a 65-year-old couple that retired in 2023 can expect to spend approximately $315,000 on healthcare and medical expenses throughout the course of their retirement?3 That’s a huge number that illustrates the importance of planning for healthcare expenses before you retire.
One of the most effective ways to save for retirement healthcare expenses is by contributing to a health savings account (HSA) throughout your working years. HSAs offer three distinct tax advantages:
- Because contributions are made with pre-tax dollars, they reduce your taxable income
- HSA funds 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 401k contributions, there are no required minimum distributions from these accounts. 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 healthcare expenses not covered by Medicare. There are many options for supplement 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 and select a plan that’s right for you.
#5 – Establish a withdrawal strategy.
Another important step in planning for longevity is to follow an established retirement withdrawal strategy. Doing so can help ensure you don’t overspend early in retirement, leaving too few assets to cover your expenses later in life.
A general rule of thumb for retirees in their mid-60s is to withdraw no more than 4% of their retirement savings during their first year of retirement, then adjust that dollar amount for inflation each year after to maintain their spending power. Of course, the exact withdrawal percentage to begin with should depend on how much one has, their lifestyle goals, their life expectancy, their investment allocation, their desires for passing on a legacy, etc.
The following chart illustrates the potential of maintaining enough assets to last for 30 years based on various rates of withdrawal. Notice that a 4% annual withdrawal rate (adjusted annually for inflation) offers a high percentage chance that the assets invested in a portfolio of 60% stocks/40% bonds will survive for 30 years.
Your wealth manager can help you model a withdrawal plan that makes sense for you, given your personal financial situation and retirement goals. This is a critical element, as research has shown that moving to a portfolio of 80% stocks and 20% bonds has produced a sustainable withdrawal rate closer to 4.4%.4 Also, portfolios that follow a target-date retirement fund glidepath reduce sustainable withdrawal rates down to 3.5%, because the allocation to safe investments increases after retirement.5
Could you use some help planning for longevity risk? Creative Planning is here for you. Our experienced professionals help clients make smart financial decisions that take into account a wide range of personal and economic factors. We’d be happy to help you determine a retirement strategy that makes sense for your personal financial situation. To get started, schedule a call with a member of our team.
