One of the most challenging factors to account for in clients’ retirement planning is longevity. The chance of a client — or of at least one partner in a couple — living to 90 or beyond is higher than advisors might think.
Factors affecting longevity include health, family history, gender (women tend to live longer than men), marital status, wealth and profession. This is separate from life expectancy, which is simply an average of millions of people with diverse backgrounds and circumstances.
Retirement planning for all clients entails addressing a fundamental uncertainty — how long a client will live and how long the money will need to last. For clients with a reasonable expectation of living into their 90s, the complexity only increases.
These clients benefit from regular reviews of their retirement planning and their sources of income. This includes not only determining how much can be withdrawn but also which accounts to tap and when.
Here are some planning issues to consider in helping ensure that those living an extended retirement do not run out of money during their lifetime.
Likelihood of Living Until 90
According to mortality tables from the Social Security Administration, half of Americans who have reached age 65 can expect to live to at least 85 for men and 88 for women.
The probability of a 62-year-old living to at least age 90 is 30.1% for the average man and 41.8% for the average woman, according to the Social Security Administration and the Society of Actuaries.
There is a 59.3% chance that at least one spouse of a couple aged 62 will live to at least age 90, according to the same data. Those included in this table are generally wealthier than the average American: Wealth can be a positive longevity factor, so this data can be applicable to many clients.
Plan Early and Revise as Needed
With planning needing to start as early as possible and continue well into retirement years, it is important for clients in their 40s and 50s to max out contributions to their 401(k)s or other employer-sponsored retirement plans. Ensure that clients who are self-employed or who have a side gig are maxing out a self-employed retirement plan.
The regular financial planning review process includes assessing clients’ progress on accumulating a sufficient retirement nest egg, projecting how long this nest egg coupled with other sources of retirement income can last into retirement.
If clients are behind in their asset base, look at adjustments that can be made. These might include increasing savings if possible or letting them know that they might need to work longer than planned. This is especially relevant for clients with a reasonable expectation of living to 90 or beyond.
Look at all Sources of Retirement Income
It's important to stay on top of all sources of income that clients might have once they retire. These could include:
- Individual retirement accounts, 401(k)s and other tax-sheltered retirement plans
- Taxable investment accounts
- Social Security
- Workplace pension
- Annuities
- Income from employment (full or part time) or self-employment
- Income realized from the sale of a business
- Any potential inheritance including inherited IRAs
For married couples, it's important to consider what retirement income looks like for a surviving spouse into their 90s.
Claiming Social Security
When to claim Social Security is a key part of retirement income planning for most people. Benefits can be claimed as early as age 62, with the maximum benefit available at age 70.For clients who reasonably expect to live to 90, it can make sense to wait longer to claim. This will provide a larger monthly benefit, and if they live until 90 they will have exceeded their break-even point versus having claimed at an earlier age.
It’s particularly important for married couples to be strategic about claiming. Especially for couples with a big earnings gap, it can make sense for the higher-earning spouse to wait longer, possibly until age 70, to claim their benefit. This ensures that if they die first, the surviving spouse will receive the highest survivor’s benefit. With the lower-earning spouse claiming earlier, this also provides the couple with added cash flow earlier in retirement.
Develop a Retirement Withdrawal Strategy
Once clients reach retirement age, it’s important to develop a retirement withdrawal strategy that both supports their desired retirement lifestyle and that positions their nest egg to potentially extend past age 90.
The best withdrawal strategy will evolve over retirement. In the early years, it might make sense to tap retirement accounts such as a traditional IRA, especially if the client is not working full time and has not yet claimed Social Security benefits.
One approach to consider is the bucket strategy espoused by Morningstar’s Christine Benz and others. Under this strategy, clients would create three retirement buckets.
- Bucket 1 would be used to fund near-term cash needs, perhaps two to three years’ worth of expenses. This bucket would be invested in low-risk, liquid holdings like a money market fund. Additional investments might include short-term bonds such as Treasurys.
- Bucket 2 is for the intermediate term of three to five years out. This bucket should contain a mix of stocks, bonds and other cash investments with a conservative tilt. The money in this bucket would shift to Bucket 1 over time.
- Bucket 3 is geared toward long-term growth. Investments here would be stocks and other growth-oriented holdings. This would be the most volatile portion of a client’s portfolio and would need the most rebalancing and attention.
Roth Conversions
Roth IRAs can be very beneficial for clients who expect to live into their 90s. The accounts can grow tax-free and can be tapped tax-free for withdrawals as long as a client is at least age 59.5 and other requirements are met.
Roth accounts are not subject to required minimum distributions. Reduced RMDs can result in lower tax liabilities and allow money in a Roth IRA to continue to grow. Additionally, Roth IRAs can be a solid estate planning tool for clients who have non-spousal beneficiaries under the current inherited IRA rules.
A Roth conversion can make sense for clients especially in years where their tax liability might be lower than normal, while working or in retirement. In some cases, clients might retire in their early 60s but wait several years to claim Social Security benefits. This gap period is often a good time to do a Roth conversion due to the client’s generally lower tax liability.
Tax Planning
Taxes can take a large bite out of a client’s nest egg, so tax planning in retirement is critical. Managing tax liability greatly affects the level at which clients can spend in retirement.
Tax planning strategies can include:
- Determining which accounts to tap in retirement and when to tap those accounts
- Using Roth accounts, including Roth conversions
- Managing RMDs to the extent possible
- Maximizing Social Security and pension claiming decisions
Long-Term Care Planning
As clients reach their 80s and 90s, they may have care needs ranging from help with daily tasks to round-the-clock nursing home care. Funding those needs is an important part of the planning process for clients with added longevity. This might entail purchasing long-term care insurance or moving into a senior living facility. In-home care can also be an option in certain situations.
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