Q: My partner and I are in our mid-60s and considering retirement. We’re hopeful that we will continue to be in good health and be around for potentially many years to come. Our parents lived well into their 90s. I guess we’re just worried we might run out of money some day.
A: Americans are certainly living longer and, in many cases, healthier lives than ever before. That’s good news! But the downside of living longer is that the chance of you outliving your retirement income is becoming more and more real. Here are some thoughts to help get you started on your retirement-income planning.
Recent research conducted by the Society of Actuaries (SOA), a leading membership-based organization for actuaries in the United States and Canada, revealed that older Americans are living longer than previously estimated. Specifically, SOA’s data showed that, since its last report published in 2000, the life expectancy of men age 65 has risen two years from 84.6 to 86.6 in 2014. Similarly, among 65-year-old women, longevity rose 2.4 years, from 86.4 in 2000 to 88.8 in 2014.
Making your money last
Because of increased longevity, managing cash flow in retirement is more critical than ever. As a starting point, you should clarify your current financial situation, as well as any significant changes you expect. Two sources can provide this information:
• A net-worth statement, which provides a snapshot of your assets, debt and cash reserves. • A monthly or annual budget, with itemized breakdowns of your income and expenses. If you haven’t retired yet, it’s a good idea to prepare a projected budget of your retirement income and expenses.
Even with reasonable assumptions about investment returns, inflation and retirement-living costs, it is likely you will encounter unexpected changes to your cash flow over time. For this reason, experts often recommend that you maintain a cash reserve to cover at least 12 months of living expenses in an interest-bearing savings account, though your needs may vary.
You will also need to check your cash flow and budget on a monthly basis, in addition to conducting a comprehensive annual review of your financial situation and goals. As you monitor your finances, keep the following factors in mind, as any one of them could affect your cash flow and necessitate adjustments to your plan.
• Interest-rate trends and market moves may result in an increase or decrease in income from your savings and investments.
• Changes in any of the following could require you to rethink your cash-flow assumptions:
• Federal, state and local tax rates and regulations
• Social Security or Medicare benefits or eligibility
•Rules affecting employer-sponsored retirement benefits and private insurance coverage
• Inflation and health-care costs
• Life events such as marriage, the death of a spouse/partner or the addition or loss of a dependent may also affect your cash flow.
Cracking your nest egg
Another critical step in managing longevity risk is to determine how much you can realistically afford to withdraw each year from your personal savings and investments. You can rely on the expertise of a qualified financial professional to assist you with this task. Or, you can use an online calculator to help you estimate how long your money might last.
One strategy that many financial advisors recommend is to stay conservative and withdraw just 4 percent of your account balance each year. However, your annual withdrawal amount will depend on a number of factors, including the overall amount of your retirement reserves, your estimated length of retirement, annual market conditions, the expected inflation rate and your financial goals. For example, do you wish to spend down all of your assets or pass along part of your wealth to family or a charity?
No matter what your financial situation going into retirement, there are ways to potentially make what you have last as long as you need it to. Your financial advisor can help you craft, monitor and maintain a cash-management plan that works for you.
Jeremy R. Gussick is a CERTIFIED FINANCIAL PLANNER™ professional with LPL Financial, the nation’s largest independent broker-dealer.* Jeremy specializes in the financial-planning needs of the LGBT community and was recently named a 2014 FIVE STAR Wealth Manager as mentioned in Philadelphia Magazine.** He is active with several LGBT organizations in the Philadelphia region, including the Delaware Valley Legacy Fund and the Independence Business Alliance, the Philadelphia region’s LGBT chamber of commerce. OutMoney appears monthly. If you have a question for Jeremy, email [email protected] LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.
1Society of Actuaries, press release, “Society of Actuaries Releases New Mortality Tables and an Updated Mortality Improvement Scale to Improve Accuracy of Private Pension Plan Estimates,” Oct. 27, 2014. The calculations presented are based on public-mortality tables, which were developed with certain populations in mind and reflect probabilities based on averages in large populations.
This article was prepared with the assistance of Wealth Management Systems Inc. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you discuss your specific situation with a qualified tax or legal advisor. Please consult me if you have any questions.
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*As reported by Financial Planning magazine, 1996-2015, based on total revenues.
**Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of Five Star Wealth Managers.