The life expectancy in America was 68.14 years in 1950. In 2022, it increased to 79.05 years. While the thought of living longer is positive, it also raises some concerns. The longer you live, the more money you need. Hence, your retirement years may be stretched.
Retirement is a time when you have limited savings and low prospects of earning new income. Therefore, you are required to save up in your younger years to ensure you live a comfortable and financially secure life after retirement. If your life expectancy after retirement increases, you may run out of money if you do not save enough funds. Therefore, it is critical to understand the impact of living longer on your retirement and plan accordingly. You may also consider consulting with a professional financial advisor who can review your retirement needs and help you create a suitable retirement plan.
While no one can predict the future or how long they will likely live, some calculated steps can help you ensure a good life. Keep reading to know more.
What is the average lifespan after retirement?
According to the Social Security Administration (SSA), if you retire at the age of 65, you can live for another 19 to 21.5 years. A third of America’s 65-year-olds can live up to the age of 90, and one in seven 65-year-olds can live beyond the age of 95 years.
Not saving enough can be detrimental to your financial, physical, and mental well-being. At the very least, you must plan for at least 20 to 25 years of retirement to be sure of not outliving your savings. Depending on your health status and family history, you may even live longer and may have to account for a longer life.
Why is it important to plan for a longer retirement?
Retirement poses a number of financial risks. The longer you live, the more these risks are amplified. The prospects of earning, availing of loans, or depending on peers for money are significantly reduced in retirement. Therefore, it becomes extremely important to plan for a longer retirement from the very start.
Typically, you may face the following risks in retirement for which you need to save:
1. Longevity risk:
This refers to the risk of outliving your savings. If you live longer than the life you planned for, you will run out of money.
2. Health risk:
The older you grow, the more health issues you will likely have. Your expenses on healthcare will increase, and you may have to compromise on other needs in order to accommodate health expenses. Rising health insurance premiums, the increasing costs of healthcare, and other impacts of inflation on health-related expenses is also part of health risk in retirement.
3. Inflation risk:
Inflation is continually on the rise and will do so even in your retired years. Rising costs can be concerning in retirement as you have a limited pool of savings to rely on. If inflation outgrows your savings, you risk losing money.
4. Personal and family risk:
This includes personal events that can impact your finances in retirement. For example, losing a spouse and bearing the mental and financial brunt for it can be a personal risk. An unexpected event, such as getting divorced or married, and other similar events can also affect you financially.
What happens if you do not plan for a long retirement?
Not planning ahead can result in the following issues:
1. You will be forced to live below your means:
If you live past the average life expectancy after retirement, you may be forced to compromise your lifestyle. You may have to downsize and live in a small home. You may also have to cut down on expenses like dining out, traveling, and socializing and stick to the essential expenses. This can be both challenging and demoralizing. All your life’s hard work gets wasted, and you get stuck in your older years with the bare minimum.
2. You may have to depend on others:
In most cases, you may have to depend on your children. This can be difficult as it may put undue pressure on them. Your children would have their own financial commitments, loans, and wants. Adding the responsibility of taking care of their parents can be unfair and put the entire family’s well-being at risk. Further, if you have no kids, you would have no real support in your hour of need.
3. You may suffer mentally:
The repercussions of a long retirement without proper financial support are far worse on your mental health. A limited budget, low standard of living, and compromised lifestyle can negatively impact your mental health and be a cause of stress. This can further lead to other medical issues and ultimately increase your expenses.
4. You may not be able to rely on traditional withdrawal methods:
The traditional means of withdrawal, like the 4% rule, are likely to not work in a long retirement. The 4% rule states that you need to withdraw 4% of your savings in the first year of retirement. After that, you can keep adjusting inflation to the percentage and accordingly withdraw your money. However, the 4% rule may need to be tweaked with a longer retirement. There are multiple aspects that can impact your withdrawal rate. The first is inflation. The longer you live, the more years you have to combat inflation. Further, events like a recession may also impact your retirement funds. The country is said to be in recession soon, so retirees and those retiring in the near future will have to watch their investment portfolios. The market lows will shrink their returns, which, when combined with a long retirement, can wreak havoc.
What can you do to ensure a financially secure retirement?
Here are some tips that can help:
1. Start saving early, or increase your savings rate:
If you are at the beginning of your career, start saving now. Long-term investing can have many benefits, such as better returns, low risk, better market opportunities, and less financial burden. If you start saving from a young age, you have more time to plan and save in smaller quantities. This makes the process of saving easier and much more feasible. Moreover, the longer you save, the more money you have in the end, removing the risks of outliving your money.
If you are relatively older and have fewer years to retire, consider increasing your savings rate. It is critical to save more during your working years to ensure you have a large retirement nest egg later. You can increase your savings by curbing your expenses, finding ways to increase your income through better jobs or part-time work, investing more to receive better returns, etc. If you are diligent with savings and investments, you can build up your retirement fund without too many hassles.
2. Maximize your retirement account contributions:
Retirement accounts like the 401k and the Individual Retirement Account (IRA) are the foundation of your retirement savings. The most significant benefit of these accounts is that you can start using them from your very first paycheck. Most companies offer a 401k to employees. So, even if you have no inclination toward investing, you can, at the very least, invest in a company-sponsored 401k. The 401k and IRA have fixed contribution limits that are set by the Internal Revenue Service (IRS) every year. Maximizing these limits can help you build your retirement savings pool systematically. Accounts like a 401k also offer an employer match which further adds up to your retirement nest egg. As of 2022, you can contribute up to $20,500 to a 401k and $6,000 to an IRA. Moreover, if you are over the age of 50, you can contribute an additional $6,500 to a 401k and $1,000 to an IRA. So, you get to make up for the gap in your savings even at a later stage in your life.
Tax benefits are another advantage of retirement accounts like the 401k and IRA. These accounts are tax-advantaged, and further add to your savings.
3. Delay your Social Security benefits:
Delaying Social Security benefits can be an excellent way to counter the risk of a long retirement. Ideally, you can withdraw your Social Security benefits at the full retirement age (66 for those born before 1960 and 67 for those born in 1960 or later). But if you delay it, you get increased benefits. The value of your Social Security benefits checks increases by 8% for every year you do not claim your money until the age of 70. If you cross the average lifespan after retirement, your Social Security checks can help you stay afloat. So, consider postponing your retirement or using up other savings until the age of 70 and letting your Social Security grow.
4. Have a smart investment strategy:
Your investments can help you tackle future financial needs, counter inflation, and offer you peace of mind. Therefore, having a solid investment strategy is essential. It is also vital to diversify your portfolio, and to invest in companies from different sectors instead of only one. If you are investing in mutual funds, you may include small, mid, and large-cap mutual funds. You can also invest in domestic and international markets to ensure you lower your risk and enhance your returns.
5. Downsize at the right time:
Instead of being forced to downsize at a later stage in retirement due to inadequate funds, consider downsizing at the beginning of your retirement. If your children no longer live with you, you can consider moving to a smaller house. The maintenance will be easy, and you will save a lot of money. You can get rid of extra cars, electronics, furniture, etc., and save money in the long run otherwise spent on their upkeep. You can also consider moving to a tax-friendly state. Taxes are a recurrent expense in retirement. Therefore, by choosing to live in a tax-friendly state, you save thousands of dollars that you will likely pay to the government throughout your life.
6. Take help from a financial advisor:
Your retirement savings should ideally align with your life expectancy after retirement. At the same time, you also need to account for inflation, health expenses, emergencies, and more. All of these things can be effectively planned with the help of a professional. A financial advisor can help you create a dependable retirement planning strategy that caters to your goals and eliminates risks like inflation risk, health risk, personal risk, and others from the equation. Financial advisors can also be helpful in navigating through volatile markets, recessions, etc. Moreover, with a professional on board, you remove the scope of trial and error and follow a more streamlined approach to investing.
If you want your retirement savings to last you a lifetime, you need to start saving early and follow a tactful investment approach. It is also essential to keep a realistic view of your retirement needs and then plan for the future. For instance, if you have no dependents, your retirement needs will likely be less than someone with children and a dependent spouse. It also never hurts to be prepared for the worst. While you can never predict the future, you can be ready for all contingencies by being extra careful and saving more than you need anyhow.
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