The current reality is that many Americans are living to age 100 and beyond. Financially, living a long life can cause some hardships on individuals and families. Consumer Reports offers five tips to help ensure that you do not run out of money in retirement. Their article, “Can you afford to live to 100? 5 ways to start planning for financial longevity now,” says that it’s important to plan for a long life, especially if your parents lived a long time. Even if your parents died younger, if you maintain healthier habits than they had, there is a good chance that you will live longer and have to finance a retirement three or four decades long. You must determine how much money you will need to live on when you retire. A recent survey found that the majority of people are comfortable with 85% of the income they had in their last year of working, but some people are comfortable with as little as 55% of their pre-retirement income.(1) Once you have determined how much money you will need, here are their five tips to funding that retirement.
Do not claim Social Security benefits until as late as possible. You can delay payments up until age 70 and doing this will greatly increase the amount of money that you receive each month. Your benefit can be up to 8% higher with each year that you delay payments up until age 70. While some people are concerned that they will lose out on their money if they delay receiving Social Security, it’s worth waiting if you are healthy. Despite concerns that the system will run out of money by 2033, the government is working to ensure that everyone receives the Social Security benefits to which they are entitled.
Consumer Reports recommends buying a simple annuity to create income for retirement. The most satisfied retirees are those who have a pension or annuity income stream that is guaranteed* to last over their lifetime. If you don’t have a pension, you can in essence create your own with an annuity product. They recommend either a fixed immediate annuity or a deferred income annuity. Immediate annuities can help bridge the financial gap until you start receiving your Social Security payments, while deferred income annuities will pay you lifetime income that starts later in life. The second product allows you to spend early in retirement, while you are typically more active, without the risk of running out of money later in your life. The article points out that the IRS will exempt $125,000, or up to 25%, of a retirement account that is invested in a Qualified Longevity Annuity Contract from required minimum distribution rules up to age 85.(1) This newer policy allows you to delay this portion of your payouts for up to 15 years. Retirement income professor Wade Pfau says not to use more than 40% of your savings to purchase an annuity.
Long term care insurance could be an important purchase for many Americans. Nursing home, assisted living and home care are large expenses and Medicare and Medicaid don’t cover everything. By purchasing long term care insurance, you’re buying a lifetime benefit of money that can be spent flexibly as you need it. Consumer Reports recommends speaking with a financial advisor to see if you can afford this type of insurance.
Be careful with how much money you are withdrawing in the years leading up to and during retirement. The general rule is not to spend more than 4% per year, but speaking with an expert and drafting an individual plan is important. It’s a good idea to work longer and save more in those final years before retirement. That will not only help you grow your nest egg, it will also get you used to spending less as you will likely have to do during retirement.
The final tip offered by Consumer Reports is to learn about the potential benefits of Medicaid. To qualify for Medicaid, you have to be at poverty level for at least five years. There are a lot of determining factors for poverty level, so it’s typically best to speak with an elder law attorney about qualifying. You might have to transfer assets or spend down money before you qualify. This service isn’t available to everyone, but can help pay for care near the end of someone’s life if they qualify.
If you happen to be one of the rising number of Americans living to the age of 100, it is important to have a strong financial plan in place so that you don’t run out of money. Consumer Reports recommends delaying Social Security, purchasing a simple annuity, looking into long term care insurance, being careful with your spending and knowing about Medicaid to help you better prepare. Speak with an expert at Annuity FYI if you have any questions about the fixed immediate or deferred income annuities recommended by Consumer Reports.
Written by Rachel Summit
*Guarantees of annuities rely on the financial strength and claims-paying ability of the insurance company that issues them. Lifetime payouts may be a benefit of the base annuity contract, or may be offered through the additional purchase of a lifetime benefit rider.
1 “Can you afford to live to 100? 5 ways to start planning for financial longevity now.” Consumer Reports, August 2015. https://www.consumerreports.org/cro/magazine/2015/07/live-to-100/index.htm
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