Longevity Risk, or "running out of money risk," is one of the Four Horsemen of retirement. The other three are Market Risk, Tax Rate Risk, and Long-Term Care Risk. Many people successfully save over their working years, and benefit from long-term positive market returns and company retirement plan matches. But when they approach or enter retirement, nearly everyone faces the risk of running out of money. The challenge for every investor is making their savings last in a low interest rate environment and unstable markets. Here are three proven ways to ensure you will not run out of money in retirement:
- Create a comprehensive financial plan that addresses your income sources (Social Security, pensions, part-time work, etc.), your required and discretionary expenses, your tax rate, likely out-of-pocket medical costs, how you are invested, and that also addresses the "what if's" in your future. A financial plan takes into consideration rising medical costs, long-term care costs and inflation, all of which threaten to prematurely sap your savings. Financial planning will also determine the best withdrawal rate for your savings. As the saying goes, " A failure to plan is a plan to fail."
- Reduce or eliminate Tax Rate Risk by reducing your exposure to Federal Income Tax in retirement. How is this possible? As retirement expert Ed Slott would say, by converting your retirement funds from "forever taxed to never taxed." This is accomplished by shifting assets from retirement plans to Roth IRAs, and using the accumulated cash value of life insurance to help provide additional tax-free distributions. It doesn't matter how much money you've saved. All that matters is after-tax income, and with nearly $30 trillion in National Debt, and Social Security and Medicare insolvency coming within the next decade, taxes will increase in your retirement.
- Reduce Market Risk by creating guaranteed retirement income streams. These days, most retirement experts agree that annuities that provide guaranteed lifetime income can play an important role in supplementing Social Security, which is also an annuity by definition. Most fixed index annuities also provide 100% protection of your principal, like CDs, and many provide lifetime income benefits, for little or no fees. The comfort of guaranteed lifetime income is further enhanced when it is coming from retirement funds that have been converted into tax-free Roth IRAs.
These are three easy steps that you can take to prevent running out of money in retirement. Whether you take those steps alone or with the help of a professional, it is never too early or too late to start.