Living a long healthy life is a good thing—but it’s not great for your finances. The longer you live, the longer your money has to support you, and if you’re healthy, you’ll probably be out and about—traveling or going to the symphony or taking the grandkids to the zoo— which means you’ll spend even more money. If you’re unhealthy you’ll have medical expenses, but believe it or not, they’re typically not as big a threat to your finances as a long, relatively healthy life, because people with big medical expenses tend to have shorter lives.
When we create financial strategies with our clients, we plan for them to live to be 100. There are usually a few clients who say, “You’re crazy. I’m never going to live to be 100. My parents both passed away in their 80s. It’s not going to happen.” It could. The Social Security administration predicts that men who are 65 today will live to age 84 on average, and women to 86. There’s more: One in four 65-year-olds will live past the age of 90 and one in ten will live past 95. And those are the odds today. The other day a client came in to see me two weeks after he had heart surgery. Two weeks. He looked and felt great. Not too many years ago heart surgery was a seriously life-threating event. Medical advancements are coming faster and faster. You really could live to be 100.
What can you do to avoid outliving your money? To begin with, make sure you have income sources that will (or should) last as long as you do. Social Security should be there for most of you. Pensions should also last the rest of your life. Real estate can be a lifelong investment. Life income annuities will last your lifetime.
You may also want to look at your withdrawal rate. In other words, think about how much money you have, and how it can cover your period of retirement (usually 30 years).
In our experience (and according to a lot of studies), 4 percent is typically a good rate, one that can keep you in money for the rest of your years. It’s probably not a good idea to withdraw more. You may have heard recently that you shouldn’t even take out 4, that 2 percent is now the correct amount to withdraw—which means you’d need twice as much money to support your retirement. We don’t believe that’s true. The new 2 percent number is apparently a result of the Y2K and 2008 bear markets, where so many investors lost so much money. Yes, if you’d stayed in the market during those bears and taken out 4 percent, you could be in trouble today and limited to a 2 percent withdrawal rate. But if you had been out of the market, it is likely that you could have continued to withdraw 4 percent. That’s just one reason we believe in buy, hold, and sell: If you can reduce your losses by selling, it can also increase the chances that you can continue to withdraw an amount that can keep you comfortable and mitigate your longevity risk.