In a recent article, Medical News Today highlighted a recent Census Bureau report which predicts that there will be 9 million people in the USA over the age of 90 by the year 2050. Simply amazing.
Of course we get an endless stream of headlines that some older age is the new younger age (60 is the new 50 etc) mainly because, in my opinion, we have the boomer generation who never wanted to “get old” in the driver’s seat. And comments like that appeal to that generation (as they will to generations after too). But why discuss this on a financial site? Oh you know the reason.
What’s that Risk called?
Longevity Risk is the technical term in the financial planning field for living too long. I always get a chuckle out of the idea of
“living too long.” But it is a “risk” if retirement planning isn’t thought through. Typically, in the not too distant past, many people would dismiss the idea of old age planning because they didn’t think they’d get there. But as more people think things through, they realize that with medical advances, even unhealthy people are living to age 80.
Of course this brings up quality of life issues, but I won’t focus on that part for now (even though I constantly hammer my clients about health and enjoying the fruits of their savings efforts). What part of a person’s retirement income planning should be focused on living too long? And how to go about it?
How Would You Estimate Your Life Expectancy?
First, how likely is it that you would live to 95? Is longevity in your family? You may have to be a detective about this because if your parents died due to poor health decisions and you live much healthier, the numbers could be different. What would you estimate your life expectancy to be? This is an important baseline to plan from. Planning is never exact but it’s much better in my opinion, to use estimates from actual family experience coupled with average public estimates for things like life expectancy, likelihood of needing nursing care, etc.
Where’s the Money Coming From?
Check your retirement income sources. You likely have social security which if you’re over 55 at least (many politicians seem to be saying things like “if you’re over 55 your social security is safe” – means those 54 and below, bu bye?) will be a full benefit and there are some inflation adjustments. Check if your pension has inflation adjustments.
If social security will not cover all of your regular expenses, then you need to consider longevity planning. Also, you may want to have a nursing care contingency plan – even if your personal financial situation means you’ll likely qualify for Medicaid. The older you get the more likely you will need nursing care so if you are making the wise decision to plan for longevity, it makes sense to couple it with nursing care planning. From the article:
An older person’s likelihood of living in a nursing home increases sharply with age. About 1 percent of what are called the young elderly (aged 65-69) live in a nursing home. The proportion rises to 3 percent for ages 75-79, 11.2 percent for ages 85-89, 19.8 percent at ages 90-94, 31.0 percent at ages 95-99 and up to 38.2 percent among centenarians.
Also according to statistics, if you’re a woman, it’s more likely you’ll be around – when I visit retirement communities, it’s 3 or 4 or 5 to 1 women to men. Partly because men like staying home and partly because men don’t live as long as women on average.
With all of that said, you likely need to supplement the social security. I am a big fan of Floor Plus Upside planning – meaning have a fixed source of income to match your regular fixed expenses, then you could take risks with “surplus capital.” Some common ways of creating fixed income include annuities and bond ladder strategies. Often these techniques can create stable income well into old age.
There are also some newer products (see this article from a Canadian Newspaper) on the financial marketplace that specifically address longevity risk. If you live that long for example, you get a payoff. Companies are also starting to hedge this risk in pensions (see Bloomberg article). You may want to consider one of these products though initially, because of my experience discussing life only annuities with clients, many people will not like the idea of getting nothing if they die (longevity risk products can be binary – meaning you live you get paid, you die your estate gets nothing). So even if these products make sense, they often don’t get past the psychological hangups of the average person.
Long Term Care Insurance is another form of protecting from longevity risk, from a nursing care perspective. It should be discussed in your plan. I won’t go into all the nitty-gritty because a long term care planning conversation involves emotional as well as financial inputs. But this needs to be analyzed.
Will You Be Enjoying the Great Grandkids?
If you may live to 90, then you need to plan not to be broke at 90. I know people in their 80’s and 90s who have good health – enough to travel, dance, and enjoy a social life. It would be terrible to be stuck in senior housing living on $1,100 social security check wouldn’t it? Put some planning in place for these contingencies – for living too long and nursing care – that way you won’t have to worry about it. If you have to be creative about it, then so be it! Be creative but get something in place so you can enjoy your great-grandkids later!
If you are looking for some creative ideas or simply to plan properly for retirement income, get in touch with us – we can help! We work collaboratively with you to customize a plan to match your money to your personal values and goals. In that way you can be congruent financially. Call us at 781.393.0021 or drop a note in our handy CONTACT FORM. Either way we can have a chat and see what we can answer for you.