OUTLIVING YOUR MONEY

Could underestimating your longevity mean you’ll run out of retirement money?

At age 65, the average life expectancy is 84 years for a man and 86.5 years for a woman. At age 75, the average life expectancy is 86.6 years for a man and 87.6 years for a woman.1 With recent advances in medical science, it’s no longer a stretch to think that you could live to be 100. In fact, the U.S. Census Bureau projects that by 2050, there will be nearly one million centenarians.

No one wants to die sooner, so that’s great news. The problem: If your retirement plan doesn’t recognize the possibility of a long retirement, then you could potentially outlive your money.

Consider the following hypothetical example. Assume you’re 64 years old and earn $60,000 per year. You plan to retire next year at age 65. You’ve accumulated $1,000,000 in retirement savings, which you think will return a hypothetical 6 percent per year throughout your retirement. And, you have a $60,000 annual retirement need (excluding Social Security). If you have a 15-year retirement from ages 65 to 80, you’ll have no shortfall in retirement funds; in fact, you’ll end up with almost $696,000 to pass on to your heirs. On the other hand, if you have a 30-year retirement from ages 65 to 95, you’ll run out of money at age 88.2 The table below illustrates. Of course, this example above is hypothetical and for illustrative purposes only. It is not meant to represent the performance of any particular product.

Hypothetical retirement savings

Age  Savings Retirement savings needed 
64 $1,000,000.00 $0.00
64 $1,059,999.94 $0.00
66 $1,058,028.28 $61,860.00
67 $1,053,905.60 $63,777.66
68 $1,047,439.82 $65,754.77
 69 $1,038,425.39 $67,793.17
70 $1,026,642.42 $69,894.76
71 $1,011,855.72  $72,061.50
72 $993,813.88 $74,295.41
73 $972,248.18  $76,598.57
74 $946,871.51 $78,973.12
75 $917,377.18 $81,421.29 
76 $883,437.69  $83,945.35
77 $844,703.39 $86,547.66
78 $800,801.08 $89,230.64
79 $751,332.50 $91,996.79 
80 $695,872.80 $94,848.69
81 $633,968.79 $97,789.00
82 $565,137.20 $100,820.46
83 $488,862.75 $103,945.90
84 $404,596.18  $107,168.22
85 $311,752.06 $110,490.44
86 $209,706.59  $113,915.65
87 $97,795.12  $117,447.03
88  $0.00  $0.00
89  $0.00  $0.00
90  $0.00  $0.00
91  $0.00  $0.00
92  $0.00  $0.00
93  $0.00  $0.00
94  $0.00  $0.00
95  $0.00  $0.00

Source: Burling Bank. Assumes $1,000,000 in retirement savings has already been accumulated; another $60,000 is added. The money grows at a hypothetical 6 percent per year; $60,000 (in today’s dollars) is withdrawn each year. Inflation runs at 3%. This example above is hypothetical and for illustrative purposes only. It is not meant to represent performance of any particular product.

1 Source: National Center for Health Statistics, as of March 2006 (http://www.cdc.gov/nchs/data/hus/hus05.pdf#027).

2.Source: Burling Bank retirement calculator, http://www.burlingbank.com/calculators/calcs.htm.

ANNUITIES AND THEIR ROLE IN RETIREMENT

After looking at issues with living longer, let’s turn to what you n do abut it.

For example, have you spent years or possibly decades accumulating money for retirement? Perhaps you diligently put part of your paycheck into a variable annuity, mutual funds, or stocks every month. Or maybe you built up some wealth by increasing the equity in your home and now you are ready to scale down and cash out. Regardless of how you got to where you are today, you have probably seen the value of your investments fluctuate widely over the years. But now it’s time to think about how much risk you are willing to take with your future.

Those familiar with my Six Money Bucket strategy, know that this system can set up a reliable income stream for 25+ years for you and your family. Part of establishing this guarantee requires working with annuities. Not variable annuities (I don’t like these for retirees), but either fixed or immediate annuities.

Annuitizing an investment is the equivalent of getting out of the game and cashing in your chips. Generally this means looking for a steady income and in return giving up the chance of hitting the jackpot in the future. But should you accept the risk of losing an opportunity in exchange for a secure return? The best way to start to answer that question is to look at what is going on around you.

As illustrated above, people are living longer. Thus the possibility of you outliving your savings is greater now than ever. And further medical advances will only improve your chances of living a long, active life. A fixed or immediate annuity may provide a steady income that you cannot outlive. (Guarantees are based on the claims-paying ability of the annuity company. The purchase of an annuity may incur substantial fees and charges. Be sure to understand these fully.)

Additionally, income from annuitization may possibly be taxed more efficiently. This may give you more money to spend when compared to other ways of generating revenue. This is so because part of the proceeds from an immediate annuity is considered a return of your initial investment. Therefore, it is tax-free. The “exclusion ratio” is determined by your age and the length of the payout schedule you select. (IRAs and other retirement plans might not qualify for the exclusion. Consult with your tax professional.)

The key point here, is that by making an annuity part of your retirement planning you have several things going for you:

  1. The annuity gives you a guaranteed check for life.
  2. Social Security gives you a second leg on the chair.
  3. Your IRA/401k savings gave you the third leg to ensure you have steady income for as long as you live.