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The Retirement Risk Multiplier

longevity risk retiree retirement social security tax

There’s so much talk in TV commercials about helping retirees “reach their goals”, followed by images of a couple holding hands on a beach, gazing contentedly at a beautiful ocean scene. I get it – most people do mention to me that they’d like to travel in retirement. But do you know what retirees really want? They almost always tell me they want keep living the lifestyle to which they are accustomed, without the fear of running out of money. As simple as that. If they’re used to driving a premium car and taking annual cruises, they want to keep doing that. If they’re used to driving a mid-grade car and visiting family locally, they want to keep doing that. Interestingly, no one really wants to upgrade their lifestyle in retirement – they just don’t want to downgrade. They need the confidence to know that sustaining their lifestyle IS possible, no matter how many retirement years stretch ahead of them.

When you think about it, that’s a pretty tall order. According to the Society of Actuaries, for 65-year-old married couples, there is a 72% chance one of them will live to age 85 and a 45% chance one of them will live to age 90. Do you know someone who lived into their late 90’s? I do.

In fact, in retirement planning, we think of longevity risk, or the unknown length of time you’ll live, as a “risk multiplier”. The longer you live, the more chances you’ll experience major financial risks: market corrections, costly declining health, rising taxes, and inflation. According to the National Bureau of Economic Research, the US experienced 11 recessions during the 64 year period from 1945 – 2009, and some economists say we are on the precipice of one right now. So your investment portfolio would need to weather 4 to 6 recessions in a similar 30-year retirement, while still providing you a comfortable lifestyle and not going to zero. Retirement is not for the faint of heart!

We know that longer life expectancies make these risks a “when”, not an “if”. And these risks don’t happen in isolation. It’s entirely possible for the stock market to have a losing streak at the same time your spouse needs expensive medical care. I’m not a fan of the “head in the sand” approach to retirement planning – simply because it doesn’t work. Life IS going to happen, so let’s be ready for it; it’s much more empowering.

Here are 4 simple steps to tame the longevity risk multiplier:

1. Check your level of guaranteed income: what percentage of your income is coming from Social Security, employer pensions and income annuities? At a minimum you want your baseline, fixed expenses to be covered by guaranteed income sources. I find that my happiest, most relaxed clients have at least 2/3 of all of their monthly expenses covered by guaranteed income sources. If you don’t have an employer pension, create one yourself by repositioning a portion of your IRA into an IRA annuity that will provide income you cannot outlive. According to a 2016 LIMRA survey, nearly 70% of annuity-owning retirees are more confident they won’t outlive their money by living to age 90, compared to only 57% of their non-annuity owning retiree counterparts. Simply put, the insurance company bears the risk of how long you live and what the markets will do – they’re on the hook to pay you (and your spouse with a joint payout) for as long as you both live. Many annuities also provide increasing lifetime income, which is a powerful hedge against inflation that inevitably builds during a 30-year retirement span.

2. Split your invested assets into different categories, based on time and purpose. Investments that need to provide current income should be invested more conservatively. Investments that aren’t needed right away can have a more growth-oriented investment approach. Don’t just have one investment strategy for all of your assets – if it’s too conservative you’re giving up growth and not keeping ahead of inflation. If it’s too risky, you’re taking unnecessary risk of loss with your hard-earned retirement savings. Have some of both approaches – conservative and growth – to withstand the test of time in the unpredictable financial markets.

3. Keep an eye on the tax man. It’s easy to be lulled into a false sense of complacency when it comes to paying your taxes each year, but I encourage you to be proactive. Many retirees have a golden window of opportunity between retirement age and Required Minimum Distribution age (currently 72), when they are in the lowest tax brackets of their lives. This is a great time to squeeze in some Roth IRA conversions and build some tax-free wealth for that long-lived retirement you’re planning for. If you’re already over age 72, don’t forget about the Qualified Charitable Distribution (QCD) rules, which allow you to donate RMD’s to your favorite charity and not have to count the RMD’s as income on your tax return. This is especially helpful if you’re taking a standard deduction and not itemizing, and therefore not receiving a tax benefit for your charitable giving. With the QCD rules, you get BOTH the full standard deduction and a charitable deduction. Win, win!

4. Don’t ignore planning for health care costs that Medicare doesn’t cover. While a medicare supplement policy will pay for the vast majority of Medicare deductibles and co-insurances, there is very limited protection from home health care, assisted living and full-skilled care costs. In my opinion, this is the number one ticking time bomb that will blow up the best-laid financial plan. One solution is to look to insurance companies who provide asset-based long term care policies, where you have tax-free benefits if you need care, and a tax-free death benefit to your heirs if you don’t. Even if you’re in your 70’s and wish you had acted earlier, it's not too late. One insurance company will triple your investment to be used toward LTC costs all the way up to your age 80. There are 9 health questions for screening and that’s it. Super simple. Alternately, if you’re going to self-insure, try to have some non-IRA dollars squirreled away – they will be a more tax-efficient source of cash for you. Non-IRA dollars are only subject to capital gains tax on the growth of the account whereas IRA dollars are taxed dollar-for-dollar as ordinary income.

I always wish for my clients to live long, healthy prosperous retirements, filled with interesting adventures and peace of mind; and without one minute’s worry about whether they’ll have to live a small retirement to avoid outliving their assets. These 4 simple steps are the foundation of how I make sure that happens – they’re not complex but do require deliberate intention. If one of your 4 steps isn’t in place, today is a great day to get started!

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