Are you building a retirement nest egg that will last? For some people, that means they’re saving enough to pass wealth to future generations. For others, their nest egg is meant to provide just enough for what they need without having to work another day. But ultimately, most people save for retirement with the hopes that they won’t have to worry about the future.
For this reason, it’s important to think critically about your longevity in retirement. Together, we’ll explore longevity risk and some important questions to ask yourself so the efforts you’re making to save for retirement are in pursuit of a financially secure lifestyle.
What Is Longevity Risk in Retirement?
Simply put, longevity risk is the risk of outliving your money. And aside from investing improperly, it’s perhaps the biggest threat to your golden years. Longevity risk has become a concern for many individuals as life expectancies increase, medical treatments improve, and other sources of retirement income decrease (such as Social Security and company pensions).
But I want to clarify what it means to “outlive” your money. There’s obviously the literal risk of your life (in years) surpassing the means of your savings. But there’s also the risk of your lifestyle doing the same. So make sure you’ve taken the time to think, answer, and plan on the following questions…
Have I Carefully Considered My Possible Retirement Age?
A long and happy life in retirement might be more expensive than you anticipate. In fact, the average American is living almost ten years longer than they were in 1960. In 2015, life expectancy in the U.S. rose to 79.4 years, and this trend is only expected to continue.
As a result, it’s critical to consider when you’re going to retire and just how long that retirement might last. If we use the old rule of thumb that you’ll retire at age 65, that leaves you with 15 years or more with the need for financial independence. But perhaps retiring well before 65 is part of your ideal vision. If that means stopping work at 60 and living until you’re 90, the number of years you need to fund in retirement has doubled.
Before exploring the other risks to your retirement’s longevity, you need to have a conceptual idea of what your timeframe in retirement may actually look like. From there, you’ll gain a better idea of how much you need to save to fund your lifestyle for a greater number of years.
How Will I Continue to Earn Income in Retirement?
Just because you stop working doesn’t mean you stop needing to earn money. Ideally, all your years of hard work have allowed you to build up a sizable nest egg that works on your behalf and grows in the form of interest. But your longevity risk can increase if you overestimate this sole tactic to produce income in retirement.
The idea of just living off investment interest relies on your portfolio’s average performance, which may not always be consistent. Volatile market cycles can easily hinder your retirement’s longevity if investment income is your only paycheck. It’s important to ask yourself a few other questions like:
- Does retirement mean I stop actively earning an income completely?
- Do I have any other passive streams of income (e.g., rental properties)?
- Can I afford to invest in and create new sources of income?
Just as you diversify your investment portfolio, you can also consider ways to diversify your income streams. You may find that you still enjoy your work, and what ‘retirement’ really means is only working when you want to. Creating multiple streams of income may be able to help strengthen your security in retirement and ultimately reduce your longevity risk.
How Do I Plan On Living During Retirement?
How does your current lifestyle align with your ideal lifestyle? Do you like where you are, or are you looking to change things up when you reach retirement? It’s important to visualize the lifestyle you intend to keep throughout your retirement and reflect on your current financial habits—it’s unlikely those will suddenly change.
If the longevity of your retirement is predicated on your lifestyle costing exactly the same as it does now, you might want to think again. Some costs may decrease, but some may increase. Unfortunately, many people mistakenly think their lifestyle in retirement will cost less. Retirement comes with newfound freedom, opportunities, and purpose. And in pursuit of these things, you often have to adjust your spending.
Your lifestyle in retirement could include traveling the world, spending more time with family and friends, picking up new hobbies, volunteering, or even starting a new business venture. It’s often the case that these new pursuits are accompanied by new expenses. And if you’re only adding new expenses and no new savings or sources of income, you increase your longevity risk.
To plan for this, consider the lifestyle changes that support your vision of retirement and how you will fund any new changes. Maybe it means downsizing your home because the kids are out on their own and you want to spend more time traveling. Or maybe it means starting a fun new side hustle that brings in a little bit of cash each month. Regardless, you should consider how well your retirement savings and income streams will fund the lifestyle you expect to live.
What Will Get More Expensive as I Age?
Newfound aspirations aren’t the only things that can start racking up bills in retirement. Increased costs can also come from established necessities and rising inflation. There are several costs integral to everyday life that can become more costly overtime. They include, but are not limited to:
- Housing Costs: Even after the mortgage is paid off, you will face ongoing housing costs. In fact, the average homeowner spends 1 – 4% of their home’s value on annual maintenance. If you have an older property, expect this to be on the more expensive side. Additionally, property taxes have also shown to rise steadily over time.
- Medical Costs: The potential need for things like surgeries, in-home caretakers, routine checkups, prescription medications, physical therapists, and handicap accessible devices only increase with age.
- Insurance: Your insurance payments can rise as you grow older, too. Take auto and healthcare insurance as examples. Health insurance tends to cost more for those age 55 and older. And auto insurance trends the same for drivers 70 and older.
- Grandchildren: An AARP study found that 57% of grandparents contribute towards their grandchildren’s educational costs and 37% help out with their everyday expenses. And considering how much the cost of college has increased, it’s best to think about how spending on grandchildren will affect your own longevity risk.
It can be unpleasant to think about yourself, and even your home, needing more expensive maintenance over time. But failing to consider these costs can increase your longevity risk. Furthermore, failing to account for the contributions you’d like to make to your loved ones can also hurt your ideal retirement outcomes.
Create a Strategy to Mitigate Longevity Risk in Retirement
And as you can see from the questions above, you have a lot to consider as you strategize a retirement plan for your future. But you don’t have to answer these questions on your own. At Caviness Wealth Management, we help clients engage in the retirement planning process from start to finish.
Together, we work with you to establish your retirement lifestyle goals, timeframes for their accomplishment, and an investing plan to help you pursue those goals with intention. We regularly stress test the plan we build together to account for changes and reduce longevity risk. If you have any further questions and want to see how we can help you, click here to schedule a conversation today.
Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual.
