You might have enough to live comfortably or even luxuriously until age 85. But what happens if you luckily live to be 100? The good news? There are numerous strategies you can use to significantly reduce your risk of running out of money in old age.
What Does Running Out of Money Really Mean?
Running out of money in retirement — does not mean that you are completely penniless? It really is more a question of “will my savings last?” Running out means you have used up all of your retirement savings and home equity. Now you’re left with whatever guaranteed income streams you might have. (Social Security, an annuity or a pension if you are lucky).
Most people who run out of money in retirement continue to scrimp by — living on Social Security income and they have probably opted into Medicaid instead of Medicare.
What are the Chances of Actually Running Out of Money in Retirement?
Recent research from the World Economic Forum finds that most U.S. retirees will likely outlive their savings by around 8 to 10 years! The study assumes a life expectancy of age 85. Retirees who live longer than that could potentially spend even more time in retirement with no savings.
- 83 percent of baby boomers in the lowest income quartile will run out of money in retirement
- 47 percent of boomers in the second lowest quartile will run out
- 28 percent of boomers in the second highest quartile will run out
- 13 percent of boomers in the highest income quartile will run out
Yikes! The above data refers to people who will be retired for 35 years. However, the information is only slightly better if you are living in retirement for 20 years. Even then a full 81 percent of the lowest income quartile and 8 percent in the highest income quartile will run out of money.
Use a 1-2 Punch to Make Sure Your Retirement Savings Will Last!
There are multiple ways to make sure your retirement savings last as long as you do. One way is to use a phased approach to utilizing your savings. Peter Tsui is the director of global research and design for S&P Dow Jones Indices. He suggests a method for handling longevity risk — you divide retirement into two phases and fund each phase separately:
Phase 1: The first phase lasts roughly from retirement age until age 85, which according to the Society of Actuaries, is close to the average life expectancy for someone who turns 65 years old in 2015. The actual average life expectancy is 87 — this means that you have at least a 50% chance of living longer than 87 (perhaps MUCH longer) and a 50% chance of living not as long.
Phase 2: The second phase is from 85 through the rest of your life — however long that might be.
Phase 2 Details
To fund the second phase of retirement, Tsui recommends that at retirement you purchase a deferred lifetime annuity with income that will begin at age 85 and last until your death.
- A deferred lifetime annuity is simply an annuity that you buy now for income that will start at a predetermined future date. Lifetime annuities pay income for as long as you live — no matter how long that will be.
- The amount of income you will want to purchase will depend on the difference between any other guaranteed lifetime income sources like Social Security and the cost of your desired lifestyle at that time. However, be sure to also factor in healthcare costs which tend to increase as you get older.
Your remaining savings can be used for the first phase of retirement. Since the time period for using these assets is known, it is much easier to determine how much you can withdraw each year.
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