Financial Strategies for Long Retirements

Many of us dream of the day we will be able to put the stress of a working life behind us and retire. We want to pursue our hobbies, volunteer for causes we care about or just be able to spend more time with the ones we love.

Early retirement is a term that feels ripe with promise. Many of my clients are intent on finding ways to retire 1, 5, even 10 years before age 65. However, for most of my clients, I counsel patience. Even the most well-heeled retirees are often surprised by the effects of inflation on retirement spending and savings. And if you’re lucky enough to live to 80, 90, or beyond, you may find that your retirement funds are insufficient to maintain an optimal lifestyle.

Retirement and Life Expectancy

According to the U.S. Department of Health and Statistics, the average American man now lives to about age 76, and the average woman lives to be 81. The U.S Census reports that about 5% of Americans will live past age 90, and that percentage is expected to increase to about 10% in the next 30 years.

We’ve all heard the statistics that when they first created Social Security back in 1935 that the average American lived to about age 60. With that statistic in mind, 65 was chosen as an age when Americans were so old that they should no longer work and should have the income needed to care for themselves in their few, final years.

It’s easy to see that, 84 years after the creation of the 65-retirement age, many Americans are still healthy and active at age 65, with years, even decades ahead of them.

The Risk of Outliving Your Assets

While many people save for decades for a good retirement, it’s important to allocate assets in ways that mitigate the risk of running out of money. For those of us lucky enough to live 10-30+ years past 65, inflation will also have a big impact on your spending power.

Longevity and inflation will both have a significant impact on your retirement funds, so it’s smart to talk to your financial advisor about ways to reduce the impact of these two factors.

Strategy: Delay Claiming Your Social Security Benefits

Most of us know that we’re eligible to receive Social Security at age 65. But fewer people are aware of the benefits of postponing benefits. By delaying your claim, you’ll increase the amount of your payments significantly. Social Security benefits are also adjusted for inflation and can help you reduce the inevitable impact of rising costs.

Strategy: Annuities After Retirement

If you’ve already started collecting Social Security, you’re not out of options. To put you in a better financial position for the next years or decades, a pure life immediate or deferred income annuity may be right for you. An immediate annuity begins payouts immediately and provides an immediate guaranteed income. For retirees with ample short-term assets, deferred annuities, which withhold payouts until a later date, may be the better choice.

Both types of annuities may be an attractive investment choice for retirees because they pay principal and interest.

However, immediate annuities will not increase to accommodate inflation over time. Again, seek counsel from your financial advisor.

Strategy: Equities

Inflation is a real challenge for retirees. Younger investors with decades before retirement may mitigate the effects of inflation by investing in riskier stocks with potentially higher returns. However, for retirees, equities risk should remain lower, since the money is needed immediately, and retirees may not have decades to recover from major drops in the market.

However, dedicating some part of your portfolio to equities may help you manage inflation risks. It’s rarely wise to invest your core retirement funds in equities after retirement, but if you have significant funds reserved for splurges like travel or second homes, it may make sense to reassign that part of your portfolio to longer-term investing that might outperform inflation.

Strategy: Treasury Inflation-Protected Securities (TIPS)

Treasury Inflation-Protected Securities, or TIPS, are a type of bond that is indexed for inflation. The return volatility of short-term TIPS is small compared to other investment options. Short-term TIPS have historically offered compared favorably with the annual Consumer Price Index and may be a way to hedge inflation without the risk associated with other alternative investments such as real estate, commodities, or precious metals.

TIPS may be a good investment option for retirees who are particularly sensitive to inflation.

More Retirement Tips

For more information on retirement planning, be sure to check out other blogs on this site, including:

Find out why Most Employed Adults in the U.S. Plan to Work Past Retirement Age

Women are Less Prepared Than Men to Retire, and What to do About it

What Happens to Retirement Assets in a Divorce?

Social Security: Working After Claiming Benefits

Social Security for Married Couples

Retirement and Your Changing Health Insurance Needs

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Mark A. Vergenes is President of MIRUS Financial Partners, 110 E. King St., Lancaster, PA; 717-509-4521 or [email protected] Investment Advisor Representative offering securities and advisory services offered through Cetera Advisor Networks LLC., member FINRA/SIPC. Cetera is under separate ownership from any other named entity. Neither MIRUS Financial Partners nor Cetera Advisor Networks LLC. give tax or legal advice.