OCEAN CITY – The majority of retirees today aren’t just living longer — they’re also living younger. Still vital and energetic once they hit 65 (long considered a benchmark of old age), retirees can now expect to live another 20 to 30 years, thus opening up a tremendous range of options and opportunities for this next life stage.
While these extra years offer "a longevity bonus," they also present longevity risk — the risk that you could outlive your savings. In fact, concerns about having enough money in retirement are reflected in The 2006 Merrill Lynch New Retirement Study. The findings show that 41% of all adults do not feel prepared financially for retirement, and only 25% of baby boomers say they feel very or fairly well prepared for a secure retirement.
"The metaphor was that when you retired, you got a gold watch and the company continued to pay you," says Katherine Roy, Director of Retirement Income Management Solutions with Merrill Lynch. "Your pension, combined with Social Security, would provide for most of your income needs, with personal savings providing an added cushion."
For many retirees, that scenario no longer applies. Pension cutbacks have increased dramatically and Social Security is tenuous at best. Now, you must not only save on your own to secure your retirement but also manage the complex issues of converting those savings into an income stream that will protect you against inflation and last throughout your lifetime. This requires an income strategy, developed in concert with your financial advisor, so that you will be able to enjoy your longevity bonus while ensuring you don’t outlive your money.
Projecting how much income you’ll need to support your retirement lifestyle is the first step, says Roy. It’s not enough to simply add up all of your current expenses and decide that’s your budget. You should take a long, hard look at your personal vision of retirement. Do you want to travel? Go back to school? Start your own business?
Like many retirees, you may actually see expenses rise during your first few years of retirement. After that, expenses may drop as you achieve your retirement dreams and begin to slow down. They may rise once again during your later years as health care costs kick in. According to Roy, "You really need a personalized three-tiered income plan to address these three phases of your retirement."
Next, you’ll need to add up all of your known income sources, including pensions, Social Security payments, rental income, inheritance and trust income. If you plan to continue to work in some capacity during retirement, include that in your plan as well. A key issue to consider is when to begin receiving Social Security payments. The longer you wait, the bigger your monthly check. However, consider your income needs at different ages, as well as the factors that affect your personal life expectancy, before determining what age to start payments.
Your financial advisor can help you determine the pros and cons of taking early Social Security payments, as well as delaying your Social Security benefits, notes Roy. In addition, your financial advisor can help you decide on the best way to leverage that income with the rest of your assets to fill the gap between projected expenses and known income.
Perhaps the most important element to build into your retirement plan is time. The sooner you sit down with your financial advisor to begin crafting a strategy, the more opportunities you can create to enjoy the retirement of your dreams.
(A Merrill Lynch Senior Financial Advisor. She can be reached at 410-213-8520.)