After focusing for decades on saving for retirement, you have a new challenge after you stop working — how to make sure you don’t outlive your savings. Even if you’re careful with your spending, there’s one big unknown: You don’t know how long you will live. The average life expectancy for a 65-year-old man is currently 84, and the average 65-year-old woman is expected to live until age 86.5. But about one in three 65-year-olds will live past age 90, and a 65-year-old couple has a 25% chance that one spouse will live to age 97. You don’t want to run out of money in your 90s then live for another 10 years — especially when you don’t have many options for making up the difference.
Several financial-planning strategies can help your money last as long as you do. One way to make the calculation less intimidating is to focus on your monthly cash flow and compare where your money is coming from and where it is going. If you have some guaranteed sources of lifetime income — such as Social Security and maybe a pension — then you already have a portion of those expenses covered and may only need to withdraw enough money from your savings to fill in the gap. The following steps can help improve the chances that you won’t outlive your savings.
Compare Your Expenses With Your Guaranteed Income
Start by adding up your regular expenses in retirement, including food, utilities, any mortgage or rent payments, property taxes, insurance premiums, out-of-pocket health-care costs, and add in some money for home and car maintenance.
Then add up any guaranteed lifetime income you’ll receive in retirement, such as a pension and Social Security. The MySocialSecurity calculator can show how much you’re likely to receive in Social Security benefits based on your work record. The Social Security Administration also has several other calculators and online tools to help you estimate your benefits under various scenarios. Compare the payouts at different start dates — the longer you wait to start taking Social Security benefits (until age 70), the higher your annual payouts will be. Your annual benefits will increase by 8% for each year you delay beyond your full retirement age, until age 70. The full retirement age for Social Security benefits is 66 for people born from 1953 to 1964 (see the Social Security Administration’s retirement age calculator to look up your full retirement age). See How much will you get from Social Security? for more information about calculating your Social Security benefits.
Subtract your guaranteed income from your regular expenses, and figure out how you’ll fill in the gap. You have several options. You could withdraw money from your retirement savings on your own. Many advisors use the “4% rule” as a starting point — if you start by withdrawing up to 4% of your retirement savings each year, then increase your annual withdrawals for inflation, your savings are likely to last for at least 30 years (assuming you invest in a balanced portfolio, with half of the money in stock funds and half in bond funds and cash).
This rule of thumb can be a good starting point, but you could still run out of money if you live longer than 30 years or if your investments perform much worse then expected or inflation gets very high. Some advisors recommend limiting your withdrawals to 3% or less each year to be safer. It’s also important to reassess your plans every few years, based on the performance of your investments and your actual expenses.
If you want to guarantee that some of your income will continue for your lifetime, especially if you don’t have a pension, you could use some of your savings to buy an immediate annuity or a deferred-income annuity. These annuities pay monthly income for as long as you live — no matter how long that is — and aren’t affected by stock-market performance.
With an immediate annuity, the payouts begin right away. If a 65-year-old man invests $100,000 in an immediate annuity now, he could receive $509 per month for the rest of his life. A 65-year-old woman would receive about $478 per month. (Payouts are lower for women because they have longer life expectancies.)
You can buy an immediate annuity to help cover your regular expenses after subtracting any other sources of guaranteed income. Say, for example, that you have monthly expenses of $2,500 and your Social Security benefits and pension income cover $1,500 and you’d like to get an immediate annuity to cover the remaining $1,000. A 65-year-old man could invest about $197,000 in an immediate annuity and receive $1,000 per month for his lifetime. A 65-year-old woman would need to invest about $209,000 for the same monthly payout.
You’ll receive the highest annual payouts if you choose a “life-only” annuity, which stops payments when you die — whether that ends up being a few years or many years in the future — or you can receive slightly lower payouts if you choose to have the annuity continue to pay as long as you or your spouse lives or for at least a certain number of years.
Another option is to buy a deferred-income annuity, which doesn’t start to pay out for several years but then pays a much larger amount each year. You can buy a deferred-income annuity in your 50s or 60s, for example, and then delay the start of payouts until your 70s or even your 80s. The longer you wait, the larger the annual payouts will be. A 65-year-old man who invests $100,000 in a deferred-income annuity can receive about $1,075 each month for life starting at age 75 (or $964 per month for a woman).
To figure out how much to invest, you can estimate how much your regular expenses and any guaranteed income from a pension or Social Security are likely to rise during that time period, and buy a deferred-income annuity to fill in the gap.
For example, a 65-year-old man could invest about $140,000 in a deferred-income annuity that will pay out $1,500 per month at age 75. A woman would pay about $156,000 for the same monthly benefit. This way you have guaranteed income starting at a certain age and you know how long the rest of your savings needs to last.
You’ll receive the highest annual payouts with a life-only deferred-income annuity, which stops paying when you die (or may never start paying out if you die before the start date). Or you can get a version with lower annual payouts that provides your heirs with a death benefit if you die before receiving at least the amout you invested.
With either immediate or deferred-income annuities, you can’t access the lump sum after you invest the money, so it’s a good idea to limit your investment to 30% or less of your assets. Make sure you have enough money in other savings to cover emergencies and extra expenses. You may also need to tap your other savings to cover rising expenses through time if your annuity payouts don’t increase with inflation, which is most common (the payouts can start at 25% to 30% lower for inflation-adjusted annuities). Some people ladder annuities to help cover increasing expenses — and annual annuity payouts are higher for older buyers because their life expectancy is shorter.
It’s also important to have a plan for potentially large expenses that could derail your retirement savings, such as the cost of long-term care in a nursing home, or an assisted-living facility, or in your own home. You could set aside extra money in savings for these costs, or you could buy a long-term-care insurance policy or a hybrid life insurance/long-term-care policy to help cover these potential expenses. See What is a hybrid long-term care/life insurance policy, and how does it compare to traditional long-term-care insurance? for more information. It also helps to keep a few years’ worth of expenses in an emergency fund to cover other unexpected bills, such as car or home repairs or extra medical or prescription drug costs.
When you know that you have your regular expenses covered and that you’ve protected yourself from some other potentially large bills, then you can feel more comfortable spending some money on extras — such as travel or gifts to grandkids or charities — without worrying about outliving your savings.
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