The Power of Planning: Factoring in Longevity for a Secure Financial Future
When it comes to planning your financial future, life expectancy is a major consideration. When we meet with clients, we discuss what their family health history has been, in addition to their own health history. While it would be wonderful for both spouses to live past age 95, we know that is not likely to happen. According to Society of Actuaries’ projections, there’s a 25% chance that a 65-year-old man will live to 93; a 25% chance that a 65-year-old woman will live to 96; and for a couple 65 years old, there’s a 25% chance that the surviving spouse lives to 98.
Longevity planning is creating a personalized plan to help ensure that your income lasts through your lifetime, not just to traditional life expectancy. While pensions and Social Security can help provide guaranteed income though your lifetime, it’s important to consider other income sources, depending on your total financial picture. A financial advisor can provide advice specific to your personal situation.
In addition to how long you may live, there are other considerations in planning your retirement, such as healthcare costs, inflation, taxes, and lifestyle considerations, among others. A solid financial plan will include healthcare costs, as it’s important to account for Medicare, Medicare supplements, deductibles, co-pays, and coinsurance considerations. Also, these healthcare costs can have a much higher inflation level than other retirement expenses.
Inflation is also a factor that has been a big concern for the past year or so, as we have experienced elevated inflation in the U.S. While inflation has moderated recently, you still need to factor inflation over your retirement period and should consider working with someone who can stress test your plan at different inflation levels.
Advisors also look at how income taxes can affect your retirement picture. Some strategies during retirement can increase or decrease your tax bill. While tax-loss harvesting or charitable giving strategies can reduce your taxable income, other strategies, such as Roth conversions or increased distributions from IRAs, can bump your taxable income but could still make sense, particularly if you are in a lower marginal tax bracket today vs. in the future. These tax planning strategies are integral to the financial planning process.
While everyone would like to enjoy a comfortable lifestyle in retirement, you should also consider how much you would like to spend. Discretionary spending, such as traveling, may affect your budget early in retirement, but less so later in retirement, since we tend to slow down later in life.
A financial advisor can create a personalized financial plan that factors in these items. While planning may not seem complicated, many advisors use complex financial planning software to help provide you with a projection that is as accurate as possible. Advisors also use software that creates Monte Carlo simulations, which consider a variety of outcomes based on random variables. Because we cannot expect our individual investment portfolio to return 5% every single year for the remainder of our lives, using simulations helps create a probability of success under various conditions.
Christopher M. Stock
Financial Advisor