Life expectancies keep on growing, which means retirements are getting longer and more expensive every year. Think about it: If you retire at 65 and make it to the century mark, you'll have to live without a paycheck for 35 years. Here's how to position yourself to go the distance.
The idea of living to 100 may sound far-fetched when life expectancy for a 65-year-old is only 83.7. If you truly understand life expectancy, you'll see why living to 100 isn't such a remote possibility.
"Life expectancy is only an average. That means many of us will live way beyond it," says USAA CERTIFIED FINANCIAL PLANNER™ practitioner June Walbert. Life expectancy is also a moving target -- it stretches as we age. For example, once you reach 85, your new life expectancy is 91.5.
Walbert suggests wrapping your financial plan around an assumption that you'll live to 95 or longer. "This isn't an area where you want to roll the dice," says Walbert. "Unless you're Betty White, there aren't many second-career options for an 88-year-old."
"There's no getting around it — if you want to achieve your goal of a happy and secure retirement, you need to put a price tag on it," says Walbert. Less than half of working Americans have tried to calculate how much money they'll need for retirement, according to the Employee Benefits Research Institute.
There was a time when conventional wisdom suggested saving and investing 10% of your income. According to Walbert, that number is quickly falling out of fashion.
"Retirement portfolios took a big hit in the financial crisis and, as the economy struggles to recover, we may be looking at single-digit investment returns for quite a while," says Walbert. With these conditions, today's longer retirements and the rising cost of healthcare, you may want to cut your spending and dedicate 15% or 20% of your income to your future.
Employer retirement plans offer one of the simplest ways to put money aside and, if your employer chips in a matching contribution, it's easier to reach the lofty savings levels that Walbert suggests. Most plans allow up to $16,500 in contributions for 2011 and $17,000 in 2012, while IRAs have a $5,000 cap. And don't forget: Once you reach age 50, your 401(k) contribution limit grows by $5,500, and you can put an extra $1,000 in an IRA.
Previous generations — those whose retirements might only have lasted 10 years or so — could have gotten away with shifting their savings to cash when they retired. Today, that could be a recipe for disaster.
That's because longer retirements are more vulnerable to a stealthy financial foe: inflation. "Even at a 3.5% inflation rate, the purchasing power of a dollar will be slashed by more than 70% over 35 years," says Walbert. "If your money grows at less than the inflation rate, you're losing ground every year."
To stay one step ahead of inflation without taking too much risk in these unpredictable times, Walbert encourages considering a portfolio that combines many different types of investments, including stock and bond mutual funds and guaranteed savings annuities.
Even with a big retirement stash and a balanced portfolio, you still may be wondering how to stretch your money over three or four decades. Walbert has a simple answer: annuities. "Annuities let you turn a chunk of your savings into a stream of payments that's guaranteed to continue as long as you live -- no matter how long that is," says Walbert. You also can arrange for those payments to continue for the life of your spouse.
Some expenses drop when you stop working, but health care usually isn't one of them.
According to the Center for Retirement Research at Boston College, the average 65-year-old couple should have $260,000 set aside to cover health care expenses -- a number that includes insurance premiums and out-of-pocket costs. But to have a 90% certainty of covering the costs, an Employee Benefits Research Institute study indicates a 65-year old couple without employer-subsidized retirement health benefits should have $635,000 set aside for health costs. "Medicare supplements can help deflect some of those uninsured expenses," says Walbert.
The health insurance figures don't include long-term care, like a stay in a nursing home, which can cost more than $70,000 a year. Since those costs aren't covered by health insurance or Medicare, you've got to plan for them yourself. "One of the best ways to cover this risk is with long-term care insurance," says Walbert. "And even if you feel you have enough money to absorb this expense on your own, long-term care insurance can preserve your legacy for your children or charity."