Adjusting retirement savings to accommodate increased longevity
The ability to live a longer, healthier life is good news for most people. Between advances in medical technology and improved access to health-related knowledge, Americans are living longer than ever before. However, a longer life also has important ramifications for your retirement plans. After all, you don't want to outlive the money you saved for retirement. Here are a few pointers for adjusting your retirement savings to accommodate living a longer life.
Max out retirement savings while still working
For those who are still working, the ten or so years leading up to retirement are often peak earning years. Retirement plan contributions should be maximized during this period. While contributions made during the years leading up to retirement don’t have the same amount of time to grow and compound as contributions made earlier in your career, they are nonetheless important to your overall retirement savings strategy.
For those who are younger and earlier in their working careers, it's still important to save as much as you can afford to for retirement each year. The power of compounding your savings over time cannot be overstated.
Delay retirement a few years
Delaying retirement just a few years can often go a long way toward helping those approaching retirement meet their savings goals. The combination of a few additional years of retirement plan contributions and a few years of not tapping into their retirement nest egg can be a powerful combination. Additionally, this can allow those approaching retirement to delay claiming their Social Security benefits, resulting in a larger monthly benefit when they do retire.
- For those whose full retirement age (FRA) is 66, for each year that taking their Social Security benefit is delayed, the benefit increases by 8% on an annual basis. Waiting until age 70 when your benefit hits its maximum level increases the benefit by 32% versus taking it at age 66. Note that the benefit increases are graduated on a monthly basis. For example, if someone were to claim their benefit at age 67 and seven months, their benefit would be 112.7% of the benefit amount if it had been claimed at age 66.
- For those who were born after 1960 and whose FRA is age 67, the benefits of waiting to claim your benefit are similar. The earliest that Social Security benefits can be claimed is age 62, but this will result in a reduction of benefits from your FRA by as much as 30%.
The benefits of not tapping into your nest egg and additional retirement savings are powerful as well. Let’s say that you would need to tap into $50,000 of your retirement savings each year in retirement to cover your retirement lifestyle in addition to your Social Security benefits. Each year that you delay retirement means that you don’t have to tap into $50,000 for that year. This allows that $50,000 to grow as part of your investment portfolio.
Add to this continuing to fund your 403(b) or other employer-sponsored retirement plan and you can begin to see the power of delaying retirement even just a few years. That extra $25,000 (assuming you are maxing out your contributions) in salary deferrals into your retirement account, plus any employer matching, plus any profit-sharing contributions from your employer can really add up each year. Add to this the $50,000 (or whatever amount) that you didn’t withdraw from your retirement savings and it doesn’t take long for this to make a difference in the size of your nest egg.
For those who may be eligible for a defined benefit pension from their employer, working longer may serve to increase your monthly benefit. Often these plans are based on a combination of years worked with your employer and your career earnings. Working longer can help increase both metrics.
Look at products that provide guaranteed lifetime income
Those approaching retirement, or those who are newly retired, should consider annuities and related products that offer lifetime income that they can’t outlive. For those without a pension, this can act as a consistent monthly income stream that they can depend on. These products can help retirees diversify their sources of income away from investments that are tied to the volatility of the stock market. In planning your retirement cash flow, it helps to look at your sources of retirement income. These sources might include:
- Social Security
- Retirement accounts like a 403(b) or an IRA
- Savings and investments in taxable accounts
Many of these accounts can vary over time – based upon the direction of the stock market and interest rates.
The next step is to look at your expenses in retirement for things like housing, healthcare and others. Compare the two to see if the amount of steady income from sources like Social Security or a pension (if you have one) are enough to cover your ongoing fixed expenses. If they aren’t you might have a retirement income gap.
Products like annuities* can help close this income gap by providing guaranteed lifetime income that you can’t outlive and can be tailored for your exact retirement income needs.
*Guarantees are backed by the claims-paying ability of the issuing insurance company.
To learn more about retirement planning and lifetime income strategies, check out our AIG 100 site for a wealth of informational articles, videos and other resources that can help with your planning.
Planning for the long term and being realistic about your financial needs in retirement can help prevent financial issues once you're already retired – and can help you enjoy living longer.
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