How to Prepare for the Financial Risk of Living a Long Life
What do you think about when you hear the word “retirement”? I imagine you’re thinking of all the things you’ve been planning for decades—the trips you’ll take, the activities you’ll enjoy, and the people you’ll spend time with. And if you’re lucky enough to live a long life, then all the better since you’ll have even more time to enjoy the things you love.
But if you’re like many people, you may worry also about what could happen. What if you get a chronic condition? How will you pay for health care? What about an injury that requires long-term care? Could you afford it?
As a financial advisor, I’ve found that a lot of people put these concerns on the back burner. I understand. They’re significant issues that leave people feeling like they’re losing control of their futures. But ignoring them actually can make a loss of control inevitable.
With our lengthening lives, longevity financial planning is more critical than ever. Here are some financial steps to help protect you:
Start investing early: When you are young, you have decades to let your investment returns compound. If you start later, you will have to invest more money to make up for the lack of time.
What should you do if you’re starting late? Consider working with a fiduciary financial advisor. Your advisor can help you determine the steps to take across all your financial areas while you are still working.
The clarity about what’s possible can help provide the motivation and focus to create a financial foundation you feel confident can sustain you for life.
Insure for long-term care needs. Long-term care is expensive. The median national cost for a home health aide is $5,148 per month. A semi-private room in a nursing home is $7,908 a month. Except in the most limited of cases, Medicare will not pay these costs. And you will have to spend down your assets before Medicaid will help.
You need a plan to pay for potential long-term care costs. For most people, the plan is to buy long-term care insurance. Unfortunately, this insurance is also expensive, although you can get a less expensive policy when you are younger. Hybrid life–LTC insurance policies also may be less expensive. Do your research before you buy to get the best coverage for you.
Be thoughtful about Social Security. You can begin Social Security benefits at age 62, but it is important to understand that this will mean a lower Social Security payment (up to 30%).
You may want to wait until your full retirement age, which is 66-67, depending on the year you were born. At this age, you receive the full benefit you are entitled to. If you wait longer, your benefit amount will increase for each year you postpone up to 70.
If you are married, your timing decision could affect your spouse, particularly if they earned less than you over their lifetime. If you pass before your spouse, they will receive either their Social Security benefit or a portion of yours (up to 50%)—whichever is higher.
With so many factors to consider, you will want to be thoughtful about when you file and ensure your Social Security decisions are part of a well-designed income plan.
Have a plan for distributions. Create a plan before withdrawing from your IRA, 401(k), and other retirement accounts. Of course, you have to take the required minimum distributions (RMDs). But you also want to withdraw enough to meet your financial needs and goals while ensuring you don’t run out of money because you drew down your balances too quickly.
The internet has many rules of thumb for distributions from retirement accounts. Perhaps the most popular is the 4% rule, which says to withdraw 4% of your portfolio’s value each year. A financial advisor can give you a personalized distribution rate based on all your income sources, expenses, and goals.
Final Thoughts
These steps can help form the backbone of your financial longevity plan. The earlier you start, the better since you’ll have a longer timeline for saving and investing. But even if you’re starting late, you can—and should—act. You deserve to feel confident that no matter how long you live, you will have the financial foundation to enjoy it.
We offer a complimentary 15-minute call to discuss your financial situation and concerns and share how we may be able to help.
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