Unfortunately, you likely don't know when you'll die. That means you have to plan for an unknown — how many years you and, for some, your spouse might live. In other words, you have to plan to make sure you don't run out of money before you run out of life. And that's no easy task.
Thankfully, experts say there are a number of strategies to avoid or at least mitigate the risk of outliving your assets or what some describe as longevity risk.
The first order of business? "In every situation, you need to do the math," says Anna Rappaport, president of a Chicago-based retirement consulting firm bearing her name and chair of the Society of Actuaries Committee on Post-Retirement Needs and Risks committee. "General statements are helpful, but there can be different situations that lead to different results."
Remember too, Rappaport says, the appropriate period of time to plan for is typically the remaining lifetime of you and your spouse — not just you. Also, don't forget that you need to create not just income for life but to prepare for shocks such as unexpected health care expenses. "Shocks can create a major problem," says Rappaport. "And guaranteed income does not solve them."
So what strategies might you consider given all that?
Consider a SPIA to fill income needs. For his part, Joe Tomlinson, a managing member of Tomlinson Financial Planning, in Greenville, Maine, recommends first comparing all your basic expenses against your sources of what are called lifetime income such as pensions and Social Security. And if there's a gap between expenses and income, fill it with a single premium immediate annuity or SPIA and withdrawals from savings as needed. "The gap may not be smooth year-by-year," he says.
Others are fond of using SPIAs to mitigate the risk of outliving your assets, too. "An annuity not only offers secure income, but it also does not require management," Rappaport says. "This ma! kes it very good for people who do not have the skills or desire to manage their money. This also offers protection against cognitive decline."
Of note, one way to reduce your basic living expenses is to pay off your mortgage as quickly as possible before retiring or shortly thereafter. "Paying off your mortgage may be a good idea in many situations," says Rappaport. "It reduces the amount of monthly income you need."
And when buying a SPIA, Rappaport recommends comparing and contrasting policies, the pricing of which can vary on average by 8%, but can be as high as 15%. Income Solutions is among those firms offering a competitive annuity purchasing platform.
Others, meanwhile, suggest a wrinkle on the SPIA strategy: Create a laddered portfolio of income annuities, say over 20 years, combined with fixed percentage, 4% for example, withdrawals from a balance fund that increases its exposure to equity as more income annuities are purchased. "Compared to other products and strategies, it gives you a very nice combination of high lifetime income flow, low risk, growth potential, liquidity and flexibility," says Mark Warshawsky, an adjunct scholar at the American Enterprise Institute and president of ReLIAS, a retirement solutions design firm.
One decision you'll have to consider: whether to choose inflation-adjusted income annuities or those with fixed step-ups. Inflation-adjusted income annuities tend to be more expensive than those with fixed step-ups. "One might want to consider using fixed step-ups and using the other investments to hedge the risk of higher than expected inflation, or just buy the inflation-adjusted and pay extra but keep things simple," says Tomlinson. "It's a personal choice."
Identify best Social Security-claiming strategy. Experts say identifying the best possible Social Security claiming strategy will go a long way toward making sure you and your spouse reduce the risk of longevity. For some couples, it might make sense for the older/higher-earning ! spouse to! file and suspend their Social Security benefit and then delay claiming until age 70. This does two things. The younger/lower-earning spouse will be able to receive one-half her spouse's benefit. Plus, it means the surviving spouse will receive the highest possible survivor's benefit.
"This is my No. 1 strategy," says Rappaport.
According to Tomlinson, this strategy works best for healthy couples and healthy singles and less well for couples and singles who are in poor health. His advice: Consider using software that can help you identify mathematically which Social Security claiming strategy is best.
Consider choosing joint and survivor pension payout. Another way to increase the odds of not outliving your household's money: Choose, if you have a traditional pension or annuity, the joint-and-survivor payout option instead of the single life option. Doing so will reduce your current income in retirement, but it will help protect the surviving spouse. "It's worth looking at the particular numbers, but generally it's a good strategy unless there are special health considerations," says Tomlinson.
Create a laddered portfolio of inflation-adjusted securities. Some experts say laddering a portfolio of Treasury Inflation Protected Securities is one way to match your assets to future expenses. However, this is Tomlinson's least favorite way to create lifetime income. According to Tomlinson, there's no longevity protection with laddering TIPS, the strategy is unnecessarily complicated, it's not a precise way of matching income to future expenses, and it could be expensive to implement if you use an adviser.
Purchase a deferred income annuity. Another way to make sure you don't outlive your money is to purchase an annuity that doesn't start to pay you income until you turn, say 85 or 90. "With a deferred income annuity you benefit from the power of deferral and mortality credits, which is the insurer's ability to pool large groups of people together to provide more income to those w! ho live t! he longest," said says Ross Goldstein, a managing director with New York Life.
One last note: You're not the only person who's not using strategies to mitigate longevity risk. In recent focus groups conducted by the Society of Actuaries, people say they are, in effect, self-insuring against the risk of living too long. "The preferred strategy for many of the people was to retain their assets and live from the investment income," says Rappaport. "Their planning was focused on short-term cash flow management rather than on producing a secure income plan."
Robert Powell is editor of Retirement Weekly, a service of MarketWatch.com. E-mail him at rpowell@allthingsretirement.com.
No comments:
Post a Comment