How to Prepare for a Longer Retirement

You wouldn’t start a trip without having a destination in mind and a plan for getting there.  Yet, many Americans are woefully unprepared for the most important time of their lives: preparing for retirement.

According to the U.S. Department of Labor, only half of Americans have calculated how much they need to save for retirement. 

Here are the ways how to prepare for retirement in the long run. 

Plan for a longer retirement

Many employees are focused on when they can retire.  They may overlook another factor that is even more important:  how long you will need to live on your retirement income.

Don’t rely on averages.  According to the Social Security Administration, a 65-year-old can expect to live 19 to 21.5 more years, but there’s a strong possibility that you live many years beyond the average.  In fact, almost a third of 65-year-olds will live to age 90, and a surprising 1 in 7 will live beyond 95.  

How to prepare for retirement that may last 30 years or longer?

Work longer

One way to mitigate the risk of running out of money in retirement is to defer your retirement date and work longer.

The benefits of working just a little longer are significant.  According to the National Bureau of Economic Research, a 66-year-old employee who extends his retirement by only one year will reap a 7.75% rise in inflation-adjusted income, most of which comes from an increase in Social Security benefits.   

Working longer also has a profound impact on your retirement income.  A 62-year-old who works an additional eight years will increase retirement income by a whopping 40% or perhaps even more.

Working longer has benefits other than increasing income.  Those who work longer remain engaged with others.  Social isolation has been found to be a risk factor for poor mental and physical health, including “a higher prevalence of disease and increased risk of mortality.”

Those who work longer may also avoid or delay the deterioration of verbal memory, which has been found to decline 38% faster after retirement.

Those who work past age 65 may also increase their life span.  Research has found a decrease in mortality rates for those who do so.

The overall benefits of working longer were summarized in one study as follows:  “In addition to the benefits derived from increased social interactions, for many people, life derives some meaning, purpose, affiliation, and structure from the fact that they are working.  Maintaining a satisfying career can help older people sustain their sense of worth and contribute to their happiness.”

Consider a deferred annuity

A deferred annuity is an insurance agreement where the insurer promises to pay the annuity holder either a lump sum or regular income commencing at a future date.

There are different types of deferred annuities.

If you want to ensure receiving payments for the rest of your life, you will pay a lump sum premium which you will contribute before the date you start receiving regular payments (often 5-10 years before the payment date commences).  This type of annuity is called a “single premium deferred annuity.”

You could structure the annuity to continue making payments to a spouse for the balance of her life.  In these circumstances, the amount of the payments would be lower.

Some deferred annuity payments increase based on the rate of inflation.  

In addition to reducing anxiety about running out of money during your lifetime, there are tax benefits to deferred annuities.  You only pay ordinary income tax when you start to receive withdrawals but pay no taxes on the gains in your annuity before that time.

The main benefit of buying a deferred annuity is the peace of mind it provides by assuring you of income for the balance of your life, as well as your spouse’s if you elect that option.

The primary disadvantage of deferred annuities is the possibility of a loss of income if you die before the date when payments will commence unless your annuity has a death benefit or return of premium rider, both of which can be expensive.

You also lose the ability to manage your funds the way you could if they remained under your control.

Consider the benefit of purchasing a Qualified Longevity Annuity Contract (QLAC) that can be funded with money from your retirement plans.

Delay Social Security benefits

Life expectancy is more of a risk for married couples because of the higher probability that one spouse will be alive at age 92.

To maximize the Social Security benefit to the surviving spouse, experts recommend having the higher-earning spouse delay claiming Social Security until age 70. 

Be mindful of inflation

Evaluate how much risk you can take and tolerate with your investments over time.  At the very least, your investments need to keep pace with inflation, which can reduce your purchasing power and erode your savings.

Although Social Security benefits are adjusted for inflation, the premium cost of Medicare Part B increases based on its own inflation calculation, reducing or even eliminating the inflation benefit of your Social Security payment.

Evaluate your risk tolerance

Your investment portfolio should consist of stocks, bonds, and cash.  How you allocate between those asset classes determines the amount of risk in your portfolio.

Taking too much or too little risk can have serious long-term consequences when planning for a long retirement.

Plan for health care costs

According to the Fidelity Retiree Health Care Cost Estimate, an average retired couple aged 65 in 2022 may need to spend $315,000 to cover healthcare costs in retirement.  Remember that these funds will be paid after tax.

Start by carefully reviewing your Medicare options before you become eligible at age 65.

Consider supplementing your retirement savings by making “catch-up” contributions to your retirement plans if you are over age 50 and otherwise eligible.

Factor healthcare costs into your overall retirement plan.

For most of us, the goal is not simply to live a longer life.  We want to maintain our quality of life, no matter how long they last.  This goal is only achievable with careful planning that should start long before your retirement date. 

Darrell Armuth founded Sensible in 1994. Since then, he has served hundreds of clients. Darrell is a Certified Public Accountant certified by the state of Nevada.