So how can we make sure that our money lasts for our lifetime? What long life and money strategies are available to us?
Understanding the Longevity and Money Problem
Another step is assessing what guaranteed income sources will be available to you in retirement. These can include pensions and Social Security.
If you will be receiving pension income, you should inquire of your employer’s pension or HR adviser and obtain the specifics of what monthly income or lump sum benefit options you will have when you retire. A key issue here is whether the pension will include any cost of living increases.
For Social Security, you should study your annual Social Security statement and/or use the online retirement benefit estimator. This will give you important information to help you determine the best age to start taking Social Security. In some cases, it may be beneficial to having your income survive until the end to actually delay Social Security even after you stop working.
Another step is to inventory other possible sources of retirement income that you can count on.
Finally, you should attempt to make some estimate of your income needs in retirement. One technique for doing that can be learned under the economic concept of consumption smoothing.
Lifetime Retirement Income Strategies
If you are fortunate, maybe you discovered that between a pension, Social Security, and other guaranteed income, you are set for life. Just remember that being “set for life” better include some inflation protection in your retirement porfolio.
Most of us are not that lucky. In fact, even a pension is not fully guaranteed unless perhaps it comes from the federal government.
So these are the strategies I would be considering for making sure that we don’t outlive our money.
1. Spend Only Interest and Investment Income
If you have interest and dividend income that covers all of your expenses, spending only that income almost guarantees that you will not outlive your money. It’s hard to say at this point what percentage of your savings and investment income will consistently be there. Most experts put that number at between 2.5% – 4% of your invested assets. The weakness in this strategy is that it doesn’t necessarily account for inflation. The positives are: (a) you will save your principal until the end, when you might need it for long term care; (b) you are not forced to sell investments during a down market; and (c) you may have something to leave to your children or to charity.
A variation on this strategy is to include very careful drawdowns of principal as needed to compensate for inflation or for unusual major expenses. This increases the chances that your money won’t last as long as you do.
Also, don’t fall for the trap that makes you think you can spend more in the early years because you will need less in the later years. That is not always the case. You can plan for and practice “income diversity” such as by spending more of your own money in the early years after retirement so that you can afford to delay Social Security until the last possible date.
2. Purchase an Immediate Annuity
An immediate annuity gives you a guaranteed monthly income, assuming that the insurer remains solvent. This provides a high degree of security but you do lose control over your principal. There are other financial risks with annuities that you should consider.
For information on what kind of annuity income you can purchase and at what cost, try one of these life annuity calculators.
Remember that deferred annuities are quite different and often more expensive.
3. Purchase Longevity Insurance
Longevity insurance is a new phrase the insurance industry has created to characterize annuities having some different characteristics. These features include purchasing the annuity now but not having it start distributions until you are much older, say 85. This makes it a deferred fixed annuity.
One example is a policy from MetLife that for a typical 65-year-old would cost $25,000. The income from the annuity would not begin until age 85. At that point, annual income would be $20,649 for men and $16,551 for women.
Other companies are getting creative in the “longevity insurance” area. For example, Hartford Life Insurance Company offers a version of its Hartford Income Annuity that requires a one-time upfront payment. However, the buyer chooses the date to begin receiving the annuity income and is given some flexibility to change the date.
New York Life now offers a Changing Needs Option on some of its income annuities. The owner can increase the income from the annuity by up to five times the initial payment – or decrease it by half – as their needs change. The premium for an annuity with this option is greater. A 65-year-old man would pay $134,504 for an immediate annuity with $10,000 annual income guaranteed for life. If the owner wanted to double the payout ( to $20,000) beginning at age 85, he would have to pay an extra $13,979 (lump-sum payment of $148,483).
Final Thoughts on How to Make Your Retirement Income Last
This is obviously a complex subject for study for a lot of us. There are some wild cards as well, including possible changes to Social Security and/or introduction of a national health care plan. The need for long term care can also change the equation. But I don’t think it is ever too early to think about this issue and to explore all of your options. If you wait too long, you won’t have any options.
Photo credit: Sea Frost