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The New Rules for Making Your Money Last in Retirement

Philip Moeller March 3, 2015

 In today's longevity economy, retirement as we know it is disappearing. Here's what to do now.

Are you ready to live to age 95—or beyond?

It’s a real possibility. For an upper-middle-class couple age 65 today, there’s a 43% chance that one or both will reach at least age 95, according to the latest data from the Society of Actuaries.

Living longer is a good thing, of course. But there’s a downside—increasing longevity may mean the end of retirement as we know it.

Problem is, a long lifetime in retirement is a huge financial challenge. As Laura Carstensen, head of Stanford Center on Longevity, said in a recent presentation, “Most people can’t save enough in 40 years of working to support themselves for 30 or more years of not working. Nor can society provide enough in terms of pensions to support nonworking people that long.” Instead, Carstensen argues, we need to move toward a longer, more flexible working life.

Carstensen is hardly alone here. Alicia Munnell, head of the Center for Retirement Research at Boston College and a co-author of “Falling Short: The Coming Retirement Crisis and What to Do About It”, has long warned about the nation’s lack of retirement preparedness. Following the Great Recession, Munnell has pounded away at the reality that continuing to work is the only feasible strategy for many people if they wish to have any hope of affording even modestly comfortable retirements.

For many retiring Baby Boomers, the notion of working longer has appeal—not only for the additional income but as a way of staying involved and giving back. That’s what spurred Marc Freedman, founder of Encore.org, to encourage older workers to use their skills for social purpose. Chris Farrell, a Money contributor, captures this movement in his recent book, “Unretirement: How Baby Boomers are Changing the Way We Think About Work, Community, and the Good Life.”

Still, to afford a longer life, Americans will have to rethink their savings and withdrawal methods too. Right now, most retirement calculators default to no more than a 30-year time horizon. What if you want to keep your retirement income going past age 95? Fidelity’s planners suggest three alternatives that can help:

*Stay on the job longer. Say you are a 65-year old woman who earned $100,000 a year, and you have a $1 million portfolio. You’ll also receive a $30,000 Social Security benefit ($2,500 a month) and you plan to withdraw an initial $50,000 a year from your portfolio. All told, you’ll have $80,000, or 80% of your pre-retirement income. If inflation averages 2%, and the portfolio grows by 4%, your savings will likely last for 25 years, or until age 90. After that, odds are the money will run out.

But if you instead work four more years, until age 69, and keep saving 15% of your income, your portfolio will grow to $1,240,000. That would be enough to provide income for eight more years—until age 98.

*Postpone Social Security. Another move is to work two more years and defer claiming Social Security till age 67, which means your monthly benefit will rise from $2,500 to $2,850. That would replace 35% of her income, instead of 30%, and her portfolio would need replace just 45% of your pre-retirement earnings vs 50%. By age 67, your portfolio will total $1,110,000, which will deliver retirement income till age 98.

*Consider an annuity. You could purchase an immediate annuity, which would give you a lifetime stream of income. The trade-off, of course, is that your money is locked up and payments will cease when you die (unless you add a joint-and-survivor option, which would reduce your payout). Many advisers suggest using only a portion of your portfolio to buy an annuity—you might aim to cover your essential expenses with a guaranteed income stream, which would include Social Security.

A 65-year-old woman who invested $200,000 in an immediate annuity with a 2% annual inflation adjustment would receive guaranteed monthly payments of about $870 a month, or $10,440 a year, according to Income Solutions. Added to Social Security, this income would replace roughly 40% of a $100,000 salary, which will allow the rest of the portfolio to keep growing longer.

But make no mistake. This is a big decision, and many investment experts oppose locking up money in an annuity, given today’s low interest rates. But longevity investing raises the appeal of guaranteed streams of income, and annuity payouts will become more attractive if and when interest rates slowly rise toward historical norms.

Philip Moeller is an expert on retirement, aging, and health. He is the co-author of “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” and a research fellow at the Center for Aging & Work at Boston College. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.