Growing old is a privilege, but to do so in prosperity requires some forward planning. Without proper retirement planning you could fall prey to what financial planners call “longevity risk” — outliving your retirement fund.
This means more than just sorting out your contributions to an pension but making a full plan for retiring in style, with enough funds to let you live in comfort for as long as you can expect to live.
Here are a few tips to help you stay prosperous long into old age.
Step No. 1: Claim Social Security later
One of the most significant steps that most people can take is a simple one. Just wait longer to retire.
The “Spend Safely in Retirement” plan suggests waiting until age 70 to claim Social Security, then using the IRS required minimum distribution table to determine how much you can sustainably withdraw from savings each year.
Steve Vernon, a research scholar at the nonprofit Stanford Center on Longevity in Stanford, Calif., worked on a study of nearly 300 different retirement income approaches and found that this strategy was the best way for middle-income people with $100,000 to $1 million saved to create an income stream.
Step No. 2: Account for inflation
According to the Allianz Life Insurance Company, 64% of Americans don’t have a financial plan that addresses the rising cost of living in retirement. Inflation is likely to gradually erode your nest egg, and that can pose a serious threat to your prosperity in retirement.
By developing a plan to address inflation, you can help prevent a squeeze to your retirement lifestyle. One way is to makes your investments remain in at least some stocks, which generally grow faster than inflation.
Step No. 3: Account for rising medical costs
One of the aspects of inflation that is most applicable to retirees is medical inflation. Recent statistics indicate that U.S. healthcare costs are projected to outpace inflation in the broad economy, which it has done in the past as well.
Cost increases for personal health expenditures are projected to rise by 2.2% annually, vs. 1.9% for inflation, which makes it all the more important to adequately plan for expenses related to healthcare.
Step No. 4: Account for changing interest rates
Depending on your allocation, rising or falling interest rates can result changes to your investments that could increase or decrease your overall risks.
If you have not already retired, changing rates could mean you need to set aside more and more of your money each month just to keep your retirement plan on track. Or, you can cushion the impact of by investing in products that offset the changes in interest return.
Step No. 5: Estimate your life expectancy
Ultimately, how much money you need depends on how long you are likely to live. However, while life expectancy represents the number of years on average someone of a given age is expected to live, you could still be around for much longer than that.
Some tools, like the Actuaries Longevity Illustrator, allow you to plug age and health information in to get an idea of the probabilities behind you living to a certain age. This can be very useful for planning to longer horizons.