Longevity – Steps to Prevent Outliving your Nest Egg

Written by: Martin X. Shields

One of the biggest issues facing retirees is longevity and the potential of outliving their assets.  Many individuals in their 60s never seem to worry about living past their 80s but as the chart below indicates, for a couple who are both 65 today there is almost a 50% chance of one of them living to be 90 and almost a 20% chance of one of them living to age 95.

With this knowledge of how long you might live during retirement, it is important to properly plan to limit any possibility of outliving your assets.   Below are a few of the steps that should be considered.

• Flexibility – It is great having a plan during retirement to take a trip around the world or purchase a vintage car but if the markets drop by 20% in one year, it is important to be flexible with your spending and to be prudent to make adjustments on variable spending in tough economic times.

• Working Part Time – For many individuals, one of the biggest adjustments to retirement is going from working every week for the past 40 years to not working at all.  To help establish a mental, emotional and fiscal transition period, working part time during the beginning years of retirement can help people become acclimated to retirement and stretch retirement assets.

• Limited Debt – In retirement it is beneficial to limit any types of debts.   Having this mindset will allow for less fixed monthly spending requirements and provide more flexibility in a couple’s budget.  For many people, their mortgage payment is one of their biggest monthly expenses.  To be able to have a mortgage paid off before retirement reduces the expense side of the equation quite dramatically during retirement.

• Delaying Social Security  – By delaying receipt of your social security benefit from your full retirement age of 66 to age 70 you increase your monthly benefit by 32%.  So, if your cash flow will allow for it, it is very beneficial to be able to delay taking your retirement until age 70 which will provide a higher monthly benefit for the remainder of your life.  

• Avoid Being too Conservative – Although it is common to reduce the amount of risk in an investment portfolio as an individual approaches retirement age, it is important not to become too conservative in your asset allocation.  In order to provide sufficient growth in your portfolio to cover inflation it is important to have at least a 20% – 40% allocation to equities.

• Cash Buffer – By having sufficient assets in either cash or a very conservative allocation, a buffer is provided that will allow the retiree to not have to sell investments that have declined during a market correction.   Our firm recommends having two years of distributions in a very conservative allocation.

• Long-Term Care Insurance – Depending upon a couple’s situation, having long-term care insurance may not be absolutely necessary. But for many people, having long-term care insurance provides peace of mind that they will be taken care of without putting themselves in  a bad financial position should the need arise.  It also reduces the odds of a couple burning through their assets to cover these expenses.