When you hear your financial advisor mention “risk of longevity,” what exactly are we talking about here at Dynamic Wealth Management? Longevity refers to “long life” or “length of life.” Simply put, longevity risk is the risk that someone will outlive their wealth and available income.
It’s a fact that people are living longer. Not only has the average life expectancy increased, but one out of every four 65-year-olds living today will live past the age of 90. One out of 10 will live past 95–the number of people living to age 100 increased more than 43% from 2000 to 2014!
From a financial point of view, living a long time can drastically affect many of your retirement costs, impacting and presenting a “risk” to many different items in your budget—right when you will be living on a fixed income.
Let’s examine some of the issues affected by longevity:
Health care expenses are a huge chunk of any retirement budget—even with Medicare. A healthy 65-year-old couple can expect to spend approximately $266,589 to cover health care expenses not covered by Medicare Part A during their retirement for Medicare Parts B, D and a supplemental insurance policy (sometimes called Part C). This assumes at least one of them worked and paid Medicare taxes and so their Medicare Part A premiums are covered.
And that total doesn’t even include dental, vision, co-pays, deductibles and out-of-pockets. When you add those in, a couple’s costs rise to $394,954 throughout retirement. Living longer not only increases yearly health care outlays, but your chances of developing a serious health issue increase as you get older.
Your odds of becoming incapacitated also increase with age, which could lead to the need for nursing care. In fact, 70% of people over 65 end will up needing some form of assistance. The average yearly cost of a semi-private room in a nursing facility is $80,300.
Yes, you can qualify for Medicaid to cover your nursing home stay—if you spend down all of your assets to poverty level. There are options to this scenario that you definitely want to consider.
Prices will continue to get higher through the years—in fact, inflation is part of the Federal Reserve’s monetary policy. Inflation undermines your purchasing power over time. While it’s true that if the Consumer Price Index (CPI) rises in a given year, retirees sometimes get a COLA (Cost-of-Living Adjustment) increase on their Social Security benefit check, you’d best not count on that. For the last few years, there has been no COLA, primarily because of low oil/gasoline prices. It goes without saying that the longer you live, the more you will spend on consumer goods and living expenses.
If your portfolio isn’t structured properly to provide enough income for a long life, you really are at risk of running out of money. Unexpected family expenses or needing to withdraw money during a market downturn can affect your nest egg negatively for the long term (kind of like compound interest in reverse). The death of a spouse is also a risk to your income, as Social Security benefits will likely decrease and taxes will increase due to fewer household exemptions.
The point of this article is not to inspire fear, but to inspire early, realistic retirement planning. Don’t worry about the future–let’s make some solid plans! Call us at 800-799-5808 or email firstname.lastname@example.org and let’s sit down together to review your unique financial situation, needs and goals. Together, we can create a retirement plan that can help mitigate your risks.
Finding meaning / purpose can extend your life
A recent British study led by Andrew Steptoe, Director of the Institute of Epidemiology and Health care at University College London found that after taking other factors into account “people with the highest levels of ‘purpose in life’ were 30% less likely to die during the study period, living an average of two years longer than those with the lowest levels.” The study involved 9,000 people averaging 65 years old.1
James Maddux, Professor Emeritus of Psychology at George Mason University in Fairfax, Virginia, reviewed the study and his team agreed that the findings make sense. Maddux noted that “people who actively search for meaning in life may be generally better at setting goals and making plans, including health care decisions.” The study review said there is good news for people who lack a sense of purpose—“it can be increased”—for instance, other studies have found that meditation, group therapy, taking classes or volunteering can help.
Work longer, live longer
In another study in 2016 conducted by Oregon State University,2 research indicates that working past age 65 could lead to a longer life, while retiring early may be a risk factor for an earlier death. Chenkai Wu, lead author and currently a doctoral student in the College of Public Health and Human Sciences, did the original research as part of his master’s thesis.
The researchers found that healthy adults who retired one year past age 65 had an 11 percent lower risk of death from all causes, even when taking into account demographic, lifestyle and health issues. They also found that even adults who described themselves as unhealthy were likely to live longer if they kept working.
“It may not apply to everybody, but we think work brings people a lot of economic and social benefits that could impact the length of their lives,” said Wu. He became interested in the topic due to much debated mandatory retirement ages in China, which in 2015 were 50 for men and 60 for women and men in labor-intensive jobs, and 55 and 65 respectively for white-collar women and men.3
“Most research in this area has focused on the economic impacts of delaying retirement. I thought it might be good to look at the health impacts,” Wu said. “People in the U.S. have more flexibility about when they retire compared to other countries, so it made sense to look at data from the U.S.” He examined data collected from 1992 through 2010, focusing on 2,956 U.S. adults.2
Planning for a longer life
With the start of a new year, there is no better time to put a plan in place which accounts for the longer years you may live, and encompasses your deepest desires as well as your current and future financial resources. Be sure to contact your financial advisor at Dynamic Wealth Management to get 2017 off to a productive start.
1 Pfizer, Get Old, “A ‘Purpose in Life’ May Extend Yours,” by Robert Preidt, HealthDay, July 15, 2016. getold.com. https://www.getold.com/a-purpose-in-life-may-extend-yours (accessed January 17, 2017).
2 OSU, Oregon State University, News and Research Communications “Working Longer May Lead to a Longer Life, New OSU Research Shows,” 04/27/2016. oregonstate.edu. http://oregonstate.edu/ua/ncs/archives/2016/apr/working-longer-may-lead-longer-life-new-osu-research-shows (accessed January 17, 2017).
3 USCBC, The US-China Business Council, “China’s Mandatory Retirement Age Changes: Impact for Foreign Companies,” by Owen Haacke, April 1, 2015. uschina.org. https://www.uschina.org/china%E2%80%99s-mandatory-retirement-age-changes-impact-foreign-companies (accessed January 17, 2017).