I have been retired for just over three years now. I have collected my pension since July 2008 and Social Security since November 2009. Each month my pension pay stub is available to me electronically so I go online and download it into a file where I save such information. The left side of the stub shows my income and tax payments and the right side my deductions which include an amount for life insurance, health and dental insurance, long-term care insurance and my property and casualty insurance (the latter two voluntary employee pay all benefits).
In the three years since I retired, one thing has become perfectly clear to me. The left side of the stub never changes, but the right side increases each year. Then there is the right side of things that don’t appear on ones paystub, like the price of food, gasoline, health care and all the other stuff we buy.
It’s not hard to do the math and figure out that sooner or later the left side of my pay stub will be insufficient to cover the right side and still maintain my lifestyle, something will have to give. I could go out to dinner less often, I could give up or greatly reduce traveling which I enjoy immensely, or perhaps give up the occasional golf game, but regardless of what I decide to do nothing is that appealing.
I am lucky that I do have a pension, for millions of Americans the left side is IRAs or a 401(k) or perhaps there is no left side (except Social Security). In many cases not having a steady stream of income means that the left side may not stay the same, but may go down as well, the last two years present a good example; it’s a scary thought.
So what does this all mean for people not yet retired? It means longevity is your biggest concern in retirement. Simply put, you could outlive your assets or live to the point where you cannot keep up with inflation and maintain the lifestyle you desire. That lifestyle will change over the years to be sure, but regardless, it is all about the quality of life and the ability to be self-sufficient.
What does one do about this issue? There are several strategies that are very basic and apply to most people.
- Forget the idea that you are going to retire at 55, 60 or even 65 for most people that is a pipe dream that will come back to bite them when they are 70.
- If you do not have a defined benefit pension plan that provides a lifetime annuity, get one. That means take at least a portion of your 401(k) or IRA or even other savings and purchase an annuity that provides a lifetime stream of income. You can also buy annuities that include COLAs.
- Delay receiving your Social Security until at least your full retirement age, longer if possible to increase the benefit. Remember, unless you are receiving a pension from a government plan, Social Security is likely the only portion of your income with a cost of living adjustment possible. You will need a higher Social Security benefit in your older years plus if you must take Social Security at 62 to meet expenses, you probably should not be retired.
- Make sure that you have some savings/investment outside your retirement funds that you can use to help offset the effects of inflation on your basic retirement income. In other words, just because you are retired does not mean you don’t need an emergency fund.
- Don’t forget your survivors who may be counting on you for their income. Unless you take a survivor annuity either from your pension or an annuity you purchase, these benefits will stop upon your death…then what? If you take a survivor option with your annuity it will reduce your benefit or cost you more to purchase the annuity and then there is the possibility that the beneficiary will predecease you. The alternative is to have a large stash of cash somewhere or adequate life insurance to allow your dependent survivor to maintain his or her lifestyle.
There it is in a nutshell, longevity is your biggest concern in retirement, ironic isn’t it? The one thing we all wish for in retirement…a long one…is the one thing that is most difficult to deal with financially.
To see the possible annuity your assets may purchase you might want to check out the calculator at ImmediateAnnuities.com
- How much money do I need to live on in retirement? (quinnscommentary.com)
- Tax Tips for Retirement (turbotax.intuit.com)
- Getting the Most Out of Social Security (nytimes.com)
- How to Prevent Outliving Your Retirement Savings (money.usnews.com)