Americans are Living Longer… What’s Your Plan?
Americans today live longer than previous generations, and that added longevity is putting stress on traditional retirement plans and financial strategies. On average, men and women who reach the standard retirement age of 65 can anticipate living another two decades, according to the SSA (Social Security Administration).1
How does a longer life impact retirement spending, costs?
The level of retirement income will depend on the level of savings accumulated over the years. Another factor would be how much of the nest egg is tapped on a monthly basis after retirement. Market performance may also be a factor, depending on the type of retirement investments involved. Also, many people plan on combining their own savings with Social Security benefits.
Beyond questions about how much money a retiree is likely to receive through Social Security retirement benefits, there is the prospect of increased costs in retirement and how those costs may be exacerbated by longevity.
Retirees spend considerably on health care. Advanced age tends to come with increased health risks and health care costs balloon as retirees get older.
Longevity action plan
The first thing investors concerned with retirement should look at is whether to make catch up contributions. These are extra contributions to tax-advantaged retirement accounts that older savers can make without exceeding IRS limits. Essentially, it’s a way of depositing more money now as retirement approaches to draw from a bigger pool later.
This is not always ideal, as many people don’t have the flexibility or desire to compromise comfort today for comfort tomorrow.
Another low-risk alternative to catch-up contributions would be to peruse your tax-deferred funds to ensure you’ve maximized opportunities there. Who knows? You might be able to capitalize on something you missed earlier in life.
Explore additional income and benefit sources
Other savings and investment options — real estate or commodities for example — may yield higher financial rewards, but they also include their fair share of risks.
Because of the longevity concern, some savers and investors are looking at annuities, which can provide guaranteed lifetime income. They can be funded either through personal savings or a rollover of retirement funds. But different annuities offer different types of advantages and drawbacks.
Given the variety of options available and the building questions about longevity, many people opt to consult a financial professional to sort out what choices might best fit their personal circumstances.
Another option to better prepare for a longer life span is delaying retirement. Delaying your retirement by three years from age 62 to 65 can boost your assets meaningfully, thanks to the combination of making extra contributions to your employer-sponsored retirement plan, not taking withdrawals, and allowing your funds more time to grow.
Also in regard to Social Security retirement benefits, it’s important to understand that monthly benefits differ substantially based on when you start receiving them and the filing option you choose. For every year you postpone collecting benefits beyond your full retirement age (typically 66 or 67), you can earn an annual delayed retirement credit of up to 8 percent. That’s a big bump in benefits every year up to age 70.
Unfortunately, working longer isn’t always an option for many people due to the effects of age or the job market. This reinforces the need to examine options now and take what steps are necessary to ensure a financially comfortable life in the growing number of later years for most Americans.
1 Social Security Administration, “Calculator: Life Expectancy,” 2016