Can you afford to live to age 95?
Longevity is something almost all humans long for. But just how long we can remain alive -- and viable -- has been the subject of much debate. Is the maximum human lifespan 115, 125 or even 150?
While that's a fascinating question, a more practical topic to think about is how would you plan for retirement assuming you -- or your spouse or partner -- might live merely to age 95. After all, many boomers are seeing first-hand how possible this is as they care for parents or older relatives who are living well into their 90s.
There's a strong likelihood this could happen for you as well, particularly if you've earned a college education and had steady jobs with benefits for most of your career.
So let's suppose that you -- or your spouse or partner -- live to 95. Will your money last that long?
You don't want to outlive your money, be very old and very poor, and become a burden on your children, grandchildren or society. And even if you don't live to 95, it's smart to make sure your retirement income will last a long time, because chances are very good you'll make it into your late 80s or early 90s. You might even reach 100.
If you're currently in your 60s and retired or have plans to retire soon, it'll take a lot of money to be fully retired for 30 years or more. Let's just do one quick reality check to illustrate.
Suppose you spend $50,000 per year on all your living expenses -- housing, food, utilities, medical premiums, medical expenses, entertainment and so on. This isn't a bad assumption, given that the average American household age 65-74 spent $49,477 per year on these expenses in 2015, according to the Consumer Expenditure Survey. If you live 30 years, you're going to need $1.5 million, and we haven't even factored in inflation, which is sure to increase your living expenses.
Do your IRAs and 401(k) accounts total $1.5 million? The good news is, they don't have to because they don't have to cover the cost of all your expenses. You have other sources you can also count on, such as Social Security, employment income or an employer-sponsored pension, if one is coming to you.
But you'll still want to plan your finances carefully to make sure you'll have enough to cover your living expenses until age 95 and beyond.
A smart step is to maximize the sources of retirement income that are paid to you for the rest of your life, no matter how long you live. That means delaying Social Security benefits until age 70, the age at which you'll have maxed out the delayed retirement credits. If you live until age 95, you'll receive the most Social Security income over your lifetime if you start your benefits at age 70.
If you're eligible for a traditional pension that pays you a monthly income for the rest of your life, you'll also want to wait until the normal retirement age, typically age 65, to start benefits. At that age, the retirement plan no longer applies a reduction for early retirement. If your employer offers you a lump sum payment instead of the monthly pension, turn it down -- you'll receive more money over your lifetime by taking the monthly pension.
One good retirement strategy is to cover your basic living expenses with sources of income that are guaranteed for life. This way, you don't need to worry about paying for the roof over your head and food on the table if you live a long time.
Social Security is a good source of such income, which is another valid reason to wait until age 70 to start benefits. Another good source is an immediate annuity that pays you a monthly check for the rest of your life, no matter how long you live. You can use a portion of your retirement savings to buy such an annuity.
For your discretionary living expenses, such as travel and entertainment, it's not quite as critical that the money for them lasts for the rest of your life. Odds are these expenses will go down as you get older and you become less able to travel or participate in all your favorite activities.
So for these expenses, you might consider investing your remaining savings in stocks with the potential for growth. Then you can set up a systematic withdrawal plan to cover your discretionary expenses.
The possibility of living to 95 is a great reason you should work at least until age 70 (you'd still end up being retired for 25 years). You might not need to work full-time -- you could work just enough to cover your living expenses until you retire full-time. This strategy allows you to wait to start Social Security benefits, and by working longer, you'll reduce the number of years you're drawing down your retirement savings.
Finally, you'll want to have a strategy for paying for medical and long-term care expenses. You can remove most of the uncertainty about high medical expenses by participating in Medicare and buying either a Medigap or Medicare Advantage plan to supplement Medicare.
Medicare and medical insurance, however, don't typically cover long-term care expenses. For that, you'll want to buy long-term care insurance, or keep your home equity in reserve to tap in case you need long-term care, or keep an investment account that's dedicated to long-term care expenses or some combination of these strategies.
The bottom line is, it will take some careful planning to support yourself and your spouse or partner until age 95. You'll want to seriously consider working as long as you can, saving as much as you can, carefully managing your living expenses -- and creating a fulfilling and engaging life that makes it all worthwhile.
