One of the biggest concerns people have regarding retirement is running out of money. Of course, it’s a valid worry – after all, you want to live comfortably in your golden years without worrying about whether you’ll be able to pay the bills. In this guide, we will discuss some tips for preventing the risk of running out of money in retirement. Follow these tips, and you can rest easy knowing that you’ll have enough money to last throughout your retirement!
Life Expectancy and Longevity Risk
Regarding retirement income planning, longevity is often referred to as a risk multiplier.
Living longer than expected can magnify the impact of inflation, market volatility, and long-term care needs.
Yet, longevity is one of the most misunderstood risks concerning retirement income planning.
This misunderstanding stems from the confusion created by the phrase “life expectancy.”
Bill and Jill
Life expectancy is the average number of years remaining for a group of people at any given age. To understand how this impacts our retirement, consider siblings Bill and Jill.
At 65, Bill’s life expectancy is 89, meaning he needs to figure out how to make his money last 24 more years if he retires today.
Jill’s life expectancy is 90. That’s 25 years of retirement, but that’s only living to the average life expectancy.
Think of it this way.
You have 100 men in one room and 100 women in another. Half will live beyond life expectancy, and half will live less.
Furthermore, 25 out of 100 men can expect to live to age 94; 5 out of 100 could live to 100.
25 out of 100 women can expect to live to age 96, and 5 out of 100 could live to 102. As odd as it may sound, living longer than you planned is an actual risk in retirement.
We call it longevity risk, which makes all of retirement’s other risks greater. So it’s a risk multiplier.
Inflation
Take inflation. Let’s say inflation is a constant 3% during your retirement.
Today, Bill spends $100 on his groceries, but when he reaches life expectancy, his grocery cost will have more than doubled to $222.13. By age 94, his grocery bill would now be $257.51. That’s two and a half times what it was when he retired.
If Bill’s income didn’t increase in retirement, he would quickly find himself looking for ways to cut his grocery spending.
Longevity risk multiplies inflation risk, making Bill’s retirement much more challenging.
Luckily, there are financial strategies you can use to help reduce longevity risk. Contact us about using various insurance products and financial strategies that might be right for you.
How To Avoid The Risk of Running Out of Money
Fixed index annuities (FIAs) may be one potential solution to address the risk of running out of money due to living longer than anticipated. FIAs are designed to be long-term vehicles with many design options.
FIAs are subject to surrender charge schedules but provide various durations. In addition, the availability of income benefit riders, which may be offered built-in or for an additional cost, can offer retirees the ability to receive lifetime income.
Such lifetime income options can complement a retiree’s other retirement assets to build a comprehensive retirement income plan.
- CDC Info: https://www.cdc.gov/nchs/fastats/life-expectancy.htm
- How Long Will My Money Last in Retirement?
- Empower Retirement: The Only Plan to Guarantee Your Income
- The Income Rider: Never Run Out of Money in Retirement
What’s The Next Step?
We hope this guide has helped you better understand how to protect your finances during retirement. Remember, it’s never too late to start planning for your future and ensuring you have enough money to last throughout your years in the workforce. However, if you’re still feeling unsure about what steps to take next or would like some more personalized advice, don’t hesitate to contact us.
Our team of retirement experts is here to help and would be more than happy to provide you with a free quote for our services. Thanks for reading!
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