5 Ways to Increase Your Chances That Your Retirement Income Lasts
Today’s near retiree (Americans age 55-65) most likely began their working career in the 1980s. At that time, the life expectancy of a typical retiree was 14.1 years. Most recent data shows that a 65-year-old can expect to enjoy an 18.1 year retirement (Statista). Four years may not seem like a long time, but it represents needing 28.37% more in income during retirement than we originally planned on needing. This is a major reason why 60% of Americans fear running out of money during their retirement (NBC News). This fear creates anxiety, concern and panic that lifestyles will need to change and legacies will not be passed on to loved ones.
It doesn’t have to be that way.
By acting today with tools and solutions that have worked for millions of Americans, you can relieve yourself of the worry, doubt and uncertainty of running out of money and income during your retirement. There are five key considerations that you should evaluate as you plan your retirement in the next 10 years:
Maximize Social Security
Social Security is likely most Americans’ largest asset when you consider the amount of income it will produce over our retirement. Yet, we generally elect the earliest election to receive payments. This might be the biggest mistake retirees make in overall income protection. The difference of taking Social Security Income early versus deferral can be as large as 76%. You must evaluate all your income options for you and your spouse. Generally, the highest wage earner should defer to age 70 to protect the family’s income in the event of death. Social Security provides lifetime income protection and increases with cost of living increases. This increase in cost of living offsets inflation and allows you to afford the same things you buy today.
M.U.G.
Many Americans start their morning with a cup of coffee in their favorite mug. We should look at our mug in a different light as we plan for retirement. M.U.G represents our major expenses consisting of mortgage, utilities and groceries. There are other routine and constant expenses that are a necessity in life such as gas, transportation, healthcare and monthly bills. It’s important that you understand your monthly M.U.G requirements. This is referred to your spending goal. You should consider making sure you have steady and dependable income sources to cover your M.U.G. Sources will be Social Security, defined benefit pension payments, or guaranteed income purchased from insurance companies.
Inflation Protection (rising income)
Social Security may be the best source of inflation protection as it is built into Social Security income payments. You need to make sure that you can afford the same things 25 years from now as you do today. Think about expenses from when you started your working career – gas, car payments, stamps, bread, milk, phone bills. All are substantially larger than when you started your working career. That is not likely to change in your retirement years. You need to plan for your income to increase after working so that your lifestyle does not change during your extended retirement.
Shift Longevity Risk
We do not know how long our retirements will last. Because of that uncertainty, we need to shift the risk of living too long. The best outlet for shifting risk is an insurance company. Just like we purchase car insurance or homeowner’s insurance to shift the risks of loss, damage or accidents, we need to shift the risk of income. By purchasing income today for later, we shift the production of income later in life to an insurance carrier. In doing so, we have guaranteed a certain level of income regardless of if we have money left in our accounts. This safety and the backstop it provides gives a sense of security and safety to draw down our account values. By knowing we have guaranteed income when our accounts fall to dangerous levels, we can enjoy more of our retirement.
Reduce Portfolio Fatigue
Shifting the risk of longevity allows us to take pressure off our retirement accounts designated to produce income. More importantly, it relieves the drain on accounts when we don’t have positive market environments like the 2020 pandemic. Having sources of guaranteed income – even after a 20% market correction – allows the portfolio to rebound without the negative effects of withdrawing assets when account values are down. When you withdraw funds in a down market, it is like a snowball rolling downhill – it gathers momentum and grows the problem.
Successful retirement planning has one commonality – a bias toward action.
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The difference of taking Social Security Income early versus deferral can be as large as 76%.
You need to make sure that you can afford the same things 25 years from now as you do today.