Retirement Risk Solutions
Building a retirement income plan is a tough task evaluating the risks that retirees face and then developing a plan to address each one. This will be the first in a series of blog posts helping you to identify some of those risks and providing you with information to discuss with your financial advisor. The first of these risks is Longevity Risk. Since we cannot predict how long we will live, it can be a challenge to secure an adequate stream of income for an unpredictable length of time. For example, if you build a plan expecting to live to 82 and it turns out you live to 92, how will you make your money last? The average life expectancy for those alive at age 65 is 84 years for males and 86 years for females. Furthermore, one in four people will live past age 90 and one in ten will live past age 95. So how do you plan? Consider the following:
- Increasing sources of income that provide income for life. Lifetime income can be increased by deferring Social Security.
- Electing life annuity payments from an employer-sponsored retirement plan.
- Purchasing a life annuity to create a stream of income for the life of an individual or the joint lives of a couple.
- Purchasing a deferred income annuity, allowing for the pre-purchase of lifetime income which will lock in lifetime income at a later date.
- When the death benefit becomes due on a life insurance policy, the surviving spouse can choose a life annuity form of payment.
Other sources of income could include:
- Proceeds from a Home Equity Conversion Mortgage (HECM)
- Dividend paying stocks
- Rental income from income producing properties
- Periodic withdrawals from a portfolio
When planning to take periodic withdrawals from a portfolio, it is important to consider how much can be withdrawn while still ensuring the portfolio will last a lifetime. Research indicates that a withdrawal rate of four or four and a half percent, when adjusted for inflation, will be sustainable for 30 years. If planning for the possibility of a longer retirement period than 30 years, the rate of withdrawal should be adjusted downward accordingly. Portfolio sustainability is enhanced by making reductions to the withdrawal rate when the market is down. Finally, a contingency fund can be built that and used for longevity as well as other risks. Examples might include:
- A well - diversified portfolio
- The cash value of a life insurance policy
- A reverse mortgage with a line of credit
- A Roth IRA
Roth IRAs in particular are not diminished by taxes and if the funds are not needed, the Roth IRA is a very tax efficient vehicle to leave to heirs. We hope you’ve found this exploration of longevity risk beneficial. Please don’t hesitate to share your questions with us, so that we address them in future posts!