The Longevity Challenge
For most workers in our parent’s generation, the one-two punch of a healthy company pension combined with Social Security afforded a reliable retirement safety net. Back in 1975, more than 80% of private sector workers were covered by some type of company pension plan. Today, however, that percentage has dwindled to just 17%.1 And given ongoing concerns about the future solvency of Social Security, some sort of future benefit reductions seem inevitable.
Compounding the pressures associated with this steady shift in retirement income responsibility – from employers to individuals – is the fact that as a nation we continue to live longer lives.
In 1975, the average 65-year-old could have expected to live 15 ¾ years in retirement. By 2018, that life expectancy had increased another 4 ½ years. And those are merely the averages. For a healthy 65-year-old married couple, there’s a 50% chance that at least one of you will live beyond age 92, and a 25% chance that one of you will live beyond age 97.2 That means you need to plan for a retirement that may last 30 years or longer. This is especially true for women who live on average four years longer than males.
Aside from the obvious need to save more for additional years of retirement where income will be needed, longevity brings with it additional risks. First and foremost among these are the likelihood of higher lifetime healthcare expenses and an increased probability of needing some sort of long-term care.
According to the Employee Benefit Research Institute, a 65-year-old couple retiring today will need $296,000 in savings just to ensure a 90% probability of covering their out-of-pocket medical expenses throughout retirement.3 These include expenses such as Medicare and other supplemental insurance premiums, co-pays and non-covered expenses (e.g., vision care, dental and hearing), but don’t include the potential staggering costs associated with long-term care.
Approximately 70% of people over the age of 65 will need some sort of long-term care during their lifetime. With a $50,000 average annual cost for a full-time home health aide and a semi-private room in a nursing home exceeding $100,000 annually, it’s easy to understand how quickly a single major health crisis could deplete a lifetime’s worth of savings.4
Living longer also amplifies the potential for both inflation and market risks as well as the impact they can have on your savings. While inflation has been modest in recent years, the rate of inflation for things retirees are more likely to need tend to significantly outpace the overall rate of inflation. Additionally, many retirees are unaware of the impact that a few bad years of market returns early in retirement can have on their already stretched savings.
When you’re saving for retirement (and thus not drawing income from your portfolio) a few bad years (e.g., the 2000 – 2002 dotcom bubble or the 2007 – 2008 financial crisis) don’t really matter. The only thing that’s really important is the average annual return you make on your investments over the long term. In retirement, however, because you’re spending rather than adding to savings, a couple of bad years early in retirement could potentially cut in half the number of years your savings would be able to sustain you in retirement.
The income planning imperative
Retirees today are living longer, healthier and more active lives. The question is, what do you want to do with those extra years, and how will you pay for them? You need a disciplined process to help you not only clearly articulate and quantify realistic retirement spending goals, but to also align those goals to your various sources of guaranteed income so you can determine how much additional income will need to be generated from your investment portfolio.
Together with your BLBB Advisor, not only can we identify any potential income shortfall that may exist, we can explore potential solutions to narrow or eliminate that gap such as:
Boosting your tax-deferred savings with catch-up contributions;
Putting additional money aside for healthcare costs using an HSA; and/or
Generating a steady stream of investment income.
The sooner you begin income planning, the more options at your disposal and the greater your likelihood of confidently achieving the retirement of your dreams. Comprehensive financial planning (including retirement planning) is an integral part of our offering at BLB&B Advisors. Let us show you how together we can tackle the challenges that longevity risk poses to your future happiness and financial security.
1 U.S. Bureau of Labor Statistics, October 2018
2 Merrill Lynch Age Wave Survey, 2017
3 Employee Benefit Research Institute Brief, October 2018
4 Genworth 2018 Cost of Care Survey Report