Longevity in Retirement & What You Should Know
How Longevity Can Impact Your Retirement
How long will your retirement last if you stop working at age 60?
There’s obviously no definitive answer, but the latest data on life expectancies can tell us a lot.
These days, retirement can last at least 20 to 25 years if you retire at 60.1 That’s around a decade longer than a 60-year-old retiree 50 years ago.2
And if you’re not retiring for another 10+ years, you could be looking at an even longer life expectancy in retirement.3
That means a 30, 40, or even 50-year retirement for some—allowing for, essentially, an entirely new life.
6 Considerations for a Fulfilling, Long-Lasting Retirement
- Your Health & Wellness
It’s a simple and effective equation: The more you take care of yourself, the more years you’ll spend doing what you want with the people you love. Plus, prioritizing your health won’t just improve your quality of life, it can also help minimize your healthcare costs.
Maintaining good health isn't just about longevity; it's about living those extra years with vigor and joy. Think about all the activities you enjoy now—whether it’s playing with your grandchildren, traveling, gardening, or simply enjoying a walk in the park. Good health ensures you can continue to engage in these activities without hindrance. Moreover, staying healthy can prevent chronic conditions that not only reduce your quality of life but also result in hefty medical bills.
Tip: You probably know the drill by now. Maintain a healthy lifestyle, eat a nutritious diet, exercise regularly, and stay current on your regular medical check-ups.
- Your Long-Term Care Plans
By the time you’re 65, according to recent averages, there’s a 70% chance you will need long-term care (LTC). Options may include adult day care, in-home care, or a private room at a nursing home, for example.1
If LTC is needed, you could be facing bills that range from $1,600 to more than $8,500 a month.1 And you may have to cover these charges for the next 20 to 25 years.
Planning for long-term care is a critical aspect of retirement preparation. Without a concrete plan, the financial burden can be overwhelming, potentially depleting your savings. It’s essential to explore various insurance options, government programs, and personal savings strategies to ensure you can afford the care you might need. Preparing for LTC isn't just about finances; it's about peace of mind, knowing that you and your loved ones are protected against unforeseen circumstances.
Tip: Even if you’re in tip-top health, to be safe, it’s best to crunch the numbers now. Don’t forget to factor inflation into your projected calculations.
- Your Time
The thought of free time may seem like a luxury now, but for some retirees, boredom can be a problem. An overabundance of empty time in retirement can cause stress, depression, and other negative impacts that could take a serious toll on your mental and physical health.
Finding meaningful ways to spend your time is crucial for a fulfilling retirement. Engaging in activities that provide a sense of purpose and satisfaction can significantly enhance your overall well-being. Whether it's picking up a new hobby, continuing education, volunteering, or exploring new places, having a variety of activities can keep your days interesting and your mind active. Remember, retirement is a great opportunity to rediscover passions and interests that you may not have had time for during your working years.
Tip: To avoid the excess TV or clock-watching, set up a flexible life plan before you retire, and if you’re already retired—start now. Consider going back to school, practicing your hobbies, volunteering, and traveling. And be open to pivoting and trying new things if your initial plans don’t work out.
- Your Back-Up Plan
What type of financial “safety nets” do I have in place? Asking yourself this question can spotlight how much you really need to save, what resources you may need, and how to gain a stronger financial footing in the future.
Having a financial backup plan is essential for handling unexpected expenses and economic downturns. It’s not just about having savings but also understanding the various sources of income you can rely on. Diversifying your investments and having a mix of guaranteed income sources can provide stability. It's also wise to periodically review and adjust your financial plans to reflect changes in the market and your personal circumstances.
Tip: Have a crystal clear understanding of your Social Security and/or other forms of guaranteed income, and how each could bolster your current retirement plan.
- Your Relationships
What do most people miss when they stop working? It’s not the satisfaction of a job well done. It’s the social relationships they leave behind.5 Retiring can also disrupt your relationship with yourself and your loved ones, creating unexpected shifts in communication and socialization.
Maintaining strong social connections is vital for emotional and mental health. As work-related interactions decrease, finding new social circles and nurturing existing relationships becomes important. Engage in community activities, join clubs, and stay in touch with former colleagues and friends. Your relationships can provide support, joy, and a sense of belonging, all of which are crucial for a happy retirement.
Tip: Give yourself the space to redefine your identity and purpose in retirement, then devote time to meaningful relationships. Set up regular social events, such as taking a new class, going on walks with the neighbors, having a regular date night, or hosting a weekly family dinner.
- Your Support System
Beyond friends and family, where can you turn for advice or guidance when things become tough? Who’s your sounding board when you have to make complex decisions? And who can you rely on to help you see those proverbial blind spots?
Even just one professional you trust can be a powerful support system, especially when markets shift or plans go off the rails.
Building a reliable support system involves having access to trusted advisors who can offer expert guidance. Financial advisors, healthcare professionals, and even mentors can provide valuable insights and support. Regularly consulting with these professionals can help you navigate the complexities of retirement, ensuring you stay on track with your goals and make informed decisions.
Tip: Before and after you retire, check in routinely with a financial professional. Consider it a “financial wellness” check to help ensure a long, satisfying retirement.
Longevity In Retirement – What You Should Know
If you retired tomorrow, would your current retirement plan allow you to thrive for 30+ years?
What are the chances you’ll live past 90?
Most of us answer those questions wrong because we don’t have strong longevity literacy.1
That means that about 81% of us1 aren’t working with a viable understanding of our own life expectancy.
Let’s explore how understanding longevity could create a positive impact in your retirement planning.
What is longevity literacy?
Longevity literacy refers to your knowledge about expected lifespans and how it relates to retirement. Most people have poor to moderate longevity literacy, which can create a two-fold issue:
- Miscalculated retirement savings: Without a clear understanding of just how long you could live in retirement, you may not save enough, leaving you without resources for decades longer than anticipated.
- An incomplete retirement plan: Your savings shouldn't be the only focal point for retirement planning. When considering more years in retirement, plans should incorporate strategies for maintaining quality of life and making adjustments in the future.
Interestingly, longevity literacy is more prominent among some demographics.
Longevity literacy by gender & generation.
The latest research paints an eye-opening picture of longevity literacy in the U.S.2
- Men were 63% more likely than women to underestimate life expectancy. Remarkably, this is not how financial literacy trends among genders, where men outpace women.2
- Boomers and the Silent Generation tend to have the strongest longevity knowledge, with roughly 45% of individuals (within each of these generations) demonstrating strong longevity literacy versus only 30% of Gen Z and Gen Y. Given that older generations are closer to their retirement age (or they’ve retired already), it makes sense that they’d have a better understanding of longevity when compared to younger generations.2
- Gen Z and Gen Y are more likely to say they “don’t know” about longevity literacy. They’re also more likely to underestimate life spans.2
- Poor longevity literacy is linked to reduced retirement readiness. This lack of knowledge can mean that people don’t just misunderstand how long retirement could last, but they’re also lacking a strong grasp on how to draw income in retirement.2
Why longevity literacy matters in retirement & finance
A deeper understanding of your personal lifespan and how it relates to your finances can be vital to comprehensive retirement planning. Setting a more realistic timeline for your retirement can result in prudent planning and more reliable financial readiness, should your post-work life last 20 years or more.
Longevity literacy can also help you answer other crucial questions related to life in retirement, including (but not limited to):
- How long can I live on my retirement savings?
- What is my guaranteed income source?
- What will it take to maintain my quality of life for decades (and accounting for inflation in the future)?
- When should I start drawing Social Security benefits or pensions?
- What kind of healthcare, long-term care, and other expenses do I need to prepare for?
- Will I need to work for income in retirement? What could this look like?
- What strategies should I put in place now to set myself up for a happy, long-lasting retirement later?
With stronger longevity literacy, any of us can improve our retirement plans. We may also enjoy life in retirement more than we ever could’ve imagined.
Incorporating Longevity Into Retirement Planning
Let me provide you with some examples of how we approach longevity within the context of retirement planning.
Make Sure Assets Will Last Until Age 95
When I started in this industry, we used to run retirement plans to age 90 as a baseline. To account for increased longevity due to advances in medicine, we now make sure that clients’ assets last through age 95 these days.
Don’t Assume High Investment Returns Through Retirement
One thing you have less control over is investment returns. A lot of people look at the average 10% stock market return that you see bandied about in the financial media, and believe it is reasonable that they will also achieve those returns.
This will almost certainly not be the case. First, the study most often shown begins in 1926, which is an arbitrary starting point. If you went back further, the average annual return is actually less than 10%.
Second, the stock market can underperform for long periods of time, even decades. There have been 20-year periods where the U.S. stock market barely broke even. You have no control over whether you will hit one of these periods of underperformance right as you retire.
Finally, it isn’t prudent for many retirees, especially those drawing from their portfolios to live, to be 100% invested in stocks. A serious, and prolonged bear market might be all it takes for you to hit a death spiral with your savings from which you never recover.
Plan For Higher Healthcare Inflation Costs
Healthcare costs have outstripped general inflation rates for decades; therefore, you should factor this in when creating your retirement plan. We assume that healthcare costs will increase at double the baseline inflation rate when we create financial plans.
Consider Purchasing a Qualified Longevity Annuity Contract
To be honest, I’m not big on annuities for all the typical reasons. They tend to be expensive, opaque, complicated, etc. Yet single premium immediate annuities (SPIAs) are definitely worth considering if retirement income is a priority.
Beyond SPIAs, there’s also a little-known annuity created specifically to reduce the risk of outliving your savings: the qualified longevity annuity contract (QLACs).
A QLAC is a type of deferred income annuity funded directly from your IRA or 401(k). Unlike other annuities, QLACs are designed to start paying out later in life, typically at age 85. This delay in payouts can significantly enhance your financial security in your later years, ensuring that you have a steady income stream when you might need it most.
Key Features of QLACs:
- Deferral Period: QLACs allow you to defer payments up to age 85, helping to manage the risk of outliving your assets.
- Purchase Limits: The maximum amount you can use to purchase a QLAC is the lesser of $200,000 (as of 2024) or 25% of your total IRA and 401(k) balances.
- Tax Benefits: Premiums paid into a QLAC are excluded from required minimum distributions (RMDs) calculations until the payout begins, potentially reducing your taxable income during the deferral period.
- Income Security: QLACs provide a guaranteed income for life, offering peace of mind and financial stability in your advanced years.
- Customization: You can choose different options such as inflation adjustments, joint survivor benefits, and return of premium features, allowing for a tailored approach to meet your retirement needs.
Considerations When Purchasing a QLAC:
- Cost: While QLACs can be a valuable tool for long-term income security, they come with costs and fees that should be carefully evaluated.
- Liquidity: Funds used to purchase a QLAC are not easily accessible, which could limit your financial flexibility.
- Health: Since QLACs are designed to start payments later in life, they are more beneficial for individuals in good health with a longer life expectancy.
Overall, QLACs can be a strategic part of a comprehensive retirement plan, especially for those concerned about longevity risk. However, like all financial products, they should be considered in the context of your overall retirement strategy and in consultation with a financial advisor.
Final Thoughts
Longevity literacy can be key to a long, rewarding retirement. Giving you perspective on just how long retirement could last, longevity literacy can foster more effective planning while offering greater peace of mind.
And remember, when you’re ready to expand your longevity literacy and retirement plans, a financial professional can help.
Sources:
1. https://money.usnews.com/money/retirement/articles/how-living-longer-will-impact-your-retirement
2. https://www.fool.com/research/average-retirement-age/
3. https://www.census.gov/content/dam/Census/library/publications/2020/demo/p25-1145.pdf
4. https://www.ncbi.nlm.nih.gov/pmc/articles/PMC9916207/
8. https://www.wsj.com/articles/retirement-tax-break-qlac-annuity-contract-ee88fe4c
Chart Source: https://www.census.gov/content/dam/Census/library/publications/2020/demo/p25-1145.pdf
This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.
