If you plan to retire in comfort and style, don't underestimate how long you might live. Death rates in the United States have reached an all-time low, and life expectancies continue to rise. The life expectancy for a woman at birth is now 80.4 years; for a man, it's 75.4 years. T he American Society of Actuaries estimates that more than half of us will exceed average life expectancies. What's more, a 2009 article in the Lancet, a leading medical journal, projected that more than 50% of people born since 2000 in developed countries will live past 100.
Retirement planning advice often assumes a retirement of no more than three decades, but if you retired in your 50s and have a family history of longevity, you could live past 100 and experience almost five decades of retirement. Is it possible to stretch out your nest egg for that long, and if so, how?
Make Conservative Assumptions From the Beginning
It's difficult to figure out a safe rate at which to spend your retirement nest egg. You don't want to run out early or die with too much left (unless your goal is to leave behind a generous inheritance). You deserve to live comfortably and enjoy the money you worked so hard for decades to earn.
Given the nest egg you'll start your retirement with, the way it's invested now and the way you plan to change your asset allocation over time, how much can you spend per year if you live past 100? Don't forget to account for inflation. Can your annual expenses fit into this budget? Will they still fit if you have emergency expenses or rising health care costs (both of which are likely)? If not, you may need to work longer and/or invest more aggressively.
Buy a Fixed Immediate Annuity
Secure a lifetime income for yourself by purchasing a fixed immediate annuity. This investment product provides guaranteed payments on a regular basis after you make a lump sum premium payment. For additional protection, consider a more expensive inflation-adjusted annuity if you can afford it.
As another benefit, the Society of Actuaries points out that because an annuity is low-maintenance, this product can be easier for individuals to manage as they age and become less mentally acute. The downside is that if you die before you expect to, you will have paid more into the annuity than you get back unless you purchase an annuity that will pass to your heirs.
In addition to or instead of an annuity, you can set up bond ladders and CD ladders to provide ongoing, regular income.
Delay Social Security Payments
The longer you wait past your retirement age (as determined by the Social Security Administration), the higher your monthly Social Security benefits will be. Each month you wait gives you a higher monthly payout.
If your full retirement age is 65 and you retire at 65, you'll receive 100% of your Social Security benefit. However, if you wait until age 67, you'll receive 111% of your full benefit. The potential to increase your benefit ends when you reach age 70, when you will receive 127.5% of your monthly benefit if you delay taking payments.
Work for as Long as Possible
If you like your job, why not keep doing it? If you don't like your job, retire from it and pursue something you enjoy, even if it pays less. Or consider working part time rather than full time. As long as you're still capable of earning income, doing so is not a bad idea. Working keeps your mind sharp and keeps you socially involved. Continuing to earn income means putting off the day when you tap into your nest egg or drawing your savings down at a slower rate.
The Bottom Line
Relatives, charities and social safety nets will probably take care of you if you outlive your retirement savings, but why depend on others when you can provide for yourself? Consider the likely possibility that you will live longer than you think and plan your retirement spending accordingly.
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