Retiring with Increasing Longevity
Arguably the biggest challenge of retirement planning has been trying to figure out just how long a person is going to live. Yes, it would be a morbid world if everyone knew when they were going to die, but at least it would make financial planning easy.
Statistics have met retirement planners part of the way on this issue. For years, people have been able to calculate average life spans and adjust their retirement accordingly. But with healthcare ever-improving, trying to estimate an accurate retirement length today can seem like trying to hit a small target while it’s moving.
Challenges of Long Retirement
Most people would like to retire young. Even if they enjoy staying busy with work, people like to reach a point where they do not need to work. Unfortunately, the desire to retire sooner is at odds with our ability to now live longer. Though retirement age and expected lifespan will, of course, very greatly from person to person, it is becoming a bigger challenge to fund an ideal retirement.
More than 25 percent of people who reach the traditional retirement age of 65 end up living beyond age 90. This means that many people who choose to retire at the traditional age will need to fund a retirement lasts for more than half the length of their career. It’s a good problem to have, but a problem nonetheless.
But the threat from a long retirement does not just come from paying for more years of life. As longevity increases and retirements lengthen, inflation and medical costs will erode a greater percentage of retirement funds. If additional years of life go unplanned for, the last years of retirement will not only have access to less money but will also cost more to fund.
The Benefits of Longer Life
Despite the issues, our longer, healthier lives are providing some solutions to the problems they are creating. Most of the challenges of an increasing lifespan can be overcome by changing expectations and putting extra time to work.
The easiest step to planning for a longer life is simply waiting longer to retire. People are living longer beyond age 65, but, in general, they are also healthier and more active at age 65 than ever before. Individuals may hope to finish funding their retirement by that time, but it is important to recognize that the option of working after 65 will be less daunting.
Initially, this may seem like creating an opposite problem. Instead of working the same amount and trying to fund a longer retirement, this seems to suggest working longer and funding a normal retirement. However, though planning for a longer life may increase your retirement age, the extra work will allow an increase in the years you can be retired. If it takes two years of work to fund one year of retirement, a six-year increase retiree lifespan may force you to work an extra four years, but it will also increase your retirement by two years.
An important benefit of a longer life is that investment potential increases. Time is the most important element to retirement planning, and the more of it a person has, the better. Since investment growth is compounded, adding additional years at the end of a portfolio’s timeline can generate substantial extra value before retirement begins. Along with this, a longer investment timeline allows an investor to take on greater risk (and, therefore, greater growth potential) for a longer period. This growth occurs earlier in the timeline and can add considerable value as it compounds over the years.
Though delaying retirement is extremely helpful for optimizing a retirement fund, some people want to quit working as soon as possible. All retirement plans come down to the same thing: making sure there is enough money for the years ahead. That may mean waiting to retire or it could simply mean saving a larger portion of income each year. Either way, it is important for individuals to plan things out as well as possible to avoid having to return to work or forego certain care later in life.
Securing the Future
Since the biggest threat to a planned retirement is an unexpectedly long life, many retirees opt to purchase annuities. An annuity is a financial product designed to provide regular income for its owner for the rest of his or her life. Retirees should recognize, however, that annuities carry risks and do not all function the same way.* As with any retirement planning, annuities should be examined carefully to ensure they will meet the owner’s needs.
Planning for your future is a difficult task, and it is getting harder as life expectancy seem to be growing longer each day. Make sure you are preparing for retirement in the best way. Contact Safe harbor Fiduciary so that you can confidently plan for what’s ahead—no matter how long it lasts.
Have a Question about your Retirement Plan?