By Scott Ford
Have you ever thought about the possibility of living past the age of 100? It seems unattainable but you should probably plan for it – just in case.
There are currently about half a million centenarians in the world, but it is predicted that by 2050 that number will rise to 3.7 million.[1] The U.S. leads the world in sheer number of centenarians, according to available data. People are living longer than ever, and this plays a significant role in how you plan for your retirement.
What Is Longevity Risk?
Longevity risk is the risk of living longer than expected.
According to the Social Security Administration, the average life expectancy for males who are currently 65 is 84, and for females, 86. But, one in three will live past the age of 90, and one in seven will live past 95.
Based on these numbers, your retirement period could easily last 30 years instead of 20. Those 10 years could make or break you financially.
So, what strategies can you employ so that your money lasts as long as you do?
Set a Budget (And Stick to It)
A budget will protect you from financial leakage – that money wasted in small ways that add up over time. Maybe it’s that extra coffee you buy every morning and going out to lunch every day.
Sticking to a budget not only allows you to monitor your finances and keeps you on track, but it also shows you areas you can cut back on if you need to stretch out your retirement savings.
Start creating your budget by determining what your necessities are.
Ask yourself: “If I lost my job tomorrow, what expenses must I maintain to manage my household?”
This might help you realize that you don’t need the premium cable package or that hot latte every morning, but it’s necessary to keep the A/C and heater running.
Minimize Risk
Implement an investment strategy that takes into account market risk, inflation risk and time horizon. As you get closer to retirement – especially as you’re entering that stage – your asset allocation should change.
When you started investing in your younger years, your portfolio was probably weighted more heavily toward stocks and aggressive investments. However, as you age, you need to lean toward the conservative side. Focus more on preservation than growth. Stay within your risk tolerance level and protect the wealth you’ve worked so hard to build.
Plan For Healthcare Expenses
The average healthy 65-year-old couple who retired in 2018 can expect to pay $363,946 in lifetime Medicare and supplemental insurance premiums and out-of-pocket costs. This excludes long-term care. Most people don’t have that much in their retirement accounts to live on, let alone to cover medical costs.
Even with Medicare, there could be significant out-of-pocket expenses and many conditions or treatments that are not covered.
Create contingency funds to offset the damage that healthcare costs could do to your retirement income and consider long-term care insurance.
Maximize Social Security Benefits
Social Security is a major part of your retirement plan. It was designed to replace 40% of an average worker’s wages.[2] You definitely want to claim that money. However, there is no one-size-fits-all claiming strategy, so it’s critical to work with an experienced professional to make the right decisions for your situation.
Monitor Your Retirement Strategy
Life changes at a rapid pace. Stay on top of your plan and regularly reevaluate your financial situation. This will prevent major surprises down the road and will help you correct any problems as early as possible. Work with your financial advisor to continuously monitor and readjust your retirement strategy if necessary. You may need to increase your catch-up contributions or consider alternative income streams to make your money last longer.
Don’t Let Fear Stop You From Actively Saving
There’s no way to predict exactly how long you will live, but don’t let the fear of the unknown hinder you from being proactive. Work with an effective financial team to create a strategy that will reduce the impact of longevity risk on your finances.