The biggest risk retirees face is outliving their assets – spending too much or saving too little for their golden years, which are potentially a lot longer than many might expect.

According to a new report from Wells Fargo Investment Institute, citing government data, the average life expectancy for a 65-year-old man today is 84.3 years and for a 65-year-old woman 86.6 years, and  those numbers are expected to grow. By 2030, nearly one in five U.S. residents is expected to be 65 or older, according to the report Living Longer, Living Better.

Given this “longevity risk,” coupled with the declining ratio of workers to retirees to fund Social Security and Medicare and declining market growth rates, “it’s imperative to develop an appropriate and realistic plan” for a “potentially longer lifespan,” according to the report. Here are some of its key recommendations for advisors and their clients to develop instead a “longevity dividend”:

Be prepared to fund two to three decades of retirement.

1. Be prepared to fund two to three decades of retirement or more

“Whatever your current age or financial situation, we believe it’s imperative to develop an appropriate and realistic plan for your potentially longer lifespan,” the report states. “You have to fund 20, 30, 40 years of retirement if you retire at the traditional 62 to 65,” says Tracie McMillion, head of Global Asset Allocation Strategy for the Wells Fargo Investment Institute. 

According to government statistics, the average life expectancy is now four years longer than it was in 1990 – increasing on average one year for every four. If that pattern continues, 26 years from now the average life expectancy for men will be over 88 years and for women over 90. Food for thought for those now in their early 40s.

Consider the impact of rising health care costs

2. Consider the impact of rising health care costs.

While longevity is increasing, health care costs are rising. That, coupled with “diminishing defined-benefit pension plans and the uncertain future of Social Security all pose challenges and risks for retirees,” the report states.

Health care spending in the U.S. for those 65 to 84 is close to $16,000 per person – almost double the spending for those 45 to 64 years of age, according to the report, which cites 2014 data from the Health Affairs policy journal. For those 85 years or older, it doubles again to almost $35,000.

Don't count on Social Security as it is now

3. Don’t count on Social Security as it is now. Payments could decline

For most people, income from Social Security will be “insufficient, so they have to fill that gap,” says McMillion, and Social Security payments could potentially decline as a result of funding issues.

By 2030 — just 14 years from now — nearly one in five U.S. residents is expected to be 65 or older, according to the Wells Fargo report. At the same time, the ratio of workers to retirees funding Social Security is expected to be roughly 2 to 1, down from nearly 3 to 1, according to the Social Security Administration.

 “This population mismatch is likely to result in policies that place a greater burden on current workers and reduce benefits for retired workers,” according to the Wells Fargo report. “Government programs designed to assist retirees have grown disproportionately large and threaten to crowd out most other expenses by 2040 if reform is not enacted.”

Work longer, spend less or plan better if you retire earlier

4. Work longer, spend less or plan better if you retire earlier.

If “working longer is not your definition of living better” [and] “If you plan to exit the work force at an earlier age, you’ll need to plan for that,” according to the report.

To that end, Wells Fargo suggests that younger workers start saving for retirement as soon as they start working and older workers increase their exposure to equities while trimming bond holdings. In addition, Wells Fargo recommends that workers age 50 or older take advantage of catch-up contribution to IRAs and 401(k) plans.

They can contribute up to $6500 each to a traditional or Roth IRA, if they qualify, which is $1,000 more than those under 50. For 401(k) plans the maximum contribution is $24,000, or $8,000 more than the maximum for those under 50 years old.

Keep stocks in your portfolio after retirement

5. Keep stocks in your portfolio after retirement.

“It’s critical that your assets grow faster than the price of goods and services during your retirement years,” which favors stocks, according to the report.  “In the years following retirement, the potential returns from stocks over time are more likely to outpace inflation when compared to the long-term returns from cash alternatives or short maturity bonds.”

The report includes a chart showing that $2,220 in 2015 has the same purchasing power as $1,000 in 1985, 30 years earlier.

‘Your future standard of living will depend on your ability to cover living expenses throughout retirement,” according to the report.

For those retirees unwilling to take the additional market risk of stocks, the report suggests that they consider annuities instead only if they “fully understand terms and conditions.”

Maintain a diversified portfolio in retirement even if you’re wealthy

6. Maintain a diversified portfolio in retirement even if you’re wealthy.

“Asset placement, particularly for taxable assets may be important consideration … as withdrawals from retirement accounts may be taxed at different rates,” the report states.

The report recommends that wealthy retirees hold bonds in retirement accounts and growth assets, like stocks, in nonretirement accounts because their capital gains and dividends will be taxed at a lower rate than income.

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