Aging: Longevity Risk in Retirement Planning

by Judith A. McGee

A wise man once said, “Do not regret growing older. It’s a privilege denied to many.”

While that may be sage advice, aging is a fact of life, one which we will regret denying if we don’t take steps to prepare for it.

Our first wake up call might be the day that AARP membership application arrives in the mailbox! That’s when seniors start asking, “When is the best time to take Social Security; should I wait until I’m 70 and have a bigger paycheck, or take it early?   How much do I need to retire?  Will it be enough to last for the rest of my life?” 

The financial planning industry wants advisors to emphasize longevity risk when counseling retirees and pre-retirees. People are living longer and 100 year-old birthdays are not unusual. However, the Social Security Administration actuarial estimates show that only around 3% of people age 65 today will live to age 100, and that 29% of males and 39% of females will live past age 90.


Longevity Risk

As you plan for the future, be sure to consider the risk that you will outlive your retirement resources. This is the most overlooked and potentially the most impactful aspect of retirement.

If you’ve put money into a 401(k) plan or other investments on a regular basis, you weredollar-cost-averaging.  Example: purchasing shares of an investment fund in different time periods at different prices averages the price over time, which is intended to reduce market risk.  But in retirement, you practice reverse averaging, or selling investments in different time periods to fund distributions.


Cash Flow Reserve Ladder

Plan to have a portion of your investment funds held in cash and short-term, highly liquid investments. These funds can help prevent having to sell growth investments during a market correction.  Keep enough cash reserves and short-term liquid investments to fund your living expenses for at least one year.


Develop a Growing Income Stream  

You may use dividend-paying stocks for the equity portion of your portfolio to provide a growing income stream.  Did you know that over the past eighty-seven years, dividends have accounted for over 40% of the total return for the S&P 500 Index? 


Long Term Solutions

Here are three words to remember when saving for retirement, or distributing assets for income: Under-live Your Income.  

In the early years of retirement, you should limit the amount you withdraw to 4% or less.  If your investment returns are not outpacing inflation, taxes, and the withdrawal factor, your money may run out.  Review your investments.  Make sure you’re managing for risk and return, as well as income and growth.

Taxes of all kinds eat away at your cash flow.  Ask your financial and tax advisor to explain your tax returns. Can you benefit from a Roth IRA, or a Roth IRA conversion of a traditional IRA?  Roth distributions will be income tax free in retirement.  

Are dividends qualified or non-qualified?  Qualified dividends are taxed at capital gains rates; non-qualified dividends are taxed at ordinary income tax rates.  Your financial advisor can help you review your portfolio’s tax considerations.

Make sure your legal documents are in order.  Who can pay your bills, sign on your IRA accounts, manage other assets and speak with your health care providers?  Where are the powers of attorney and other legal documents kept?  Who has copies or knows how to locate them?

At some point, adult children will have growing concerns about their elders. That’s when family members need to sit down and “have the talk.”  Working together and taking steps to make sure all affairs are in order is one of the most loving things you can do for each other.


This material is being provided for information purposes onlye and is not a complete description, nor is it a reccomendation. Any opinions are those of Judith McGee and necessarily those of RJFS or Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarentee that the foregoing material is accurate or complete. Dividends are not guaranteed and must be authorized by the company’s board of directors. Investing involves rish and investors may incur a profit or loss. Like Traditional IRAs, contribution limits apply to Roth IRAs. Unless certain criteria are met, Roth IRA owners must be 59 1/2 or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Convertin to a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.