“Longevity Risk” in Retirement
What exactly is “risk of longevity”? You may have questioned this when visiting with one of our advisors at Silverhawk Private Wealth. Longevity refers to “long life” or “length of life.” Simply put, longevity risk is the risk that you will outlive your wealth.
It’s a fact that people are living longer. Not only has life expectancy increased, but statistics show that 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 centenarians—100 or older–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. It is our goal at Silverhawk to apply the Tria Formula℠ as one tool to prevent this from happening with our clients.
Let’s examine some of the issues affected by longevity:
1. Health Care
Health care expenses are a large line item in 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 on Medicare Parts B, D and a supplemental insurance policy (sometimes called Part C, Medigap or Medicare Advantage). 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 into the total health care outlay, a couple’s costs rise to $394,954 throughout retirement. Living longer not only increases yearly health care expenditures, but your chance of developing a serious health issue also rises as you get older, increasing your costs incrementally.
Your odds of becoming incapacitated also increase with age, which could lead to the need for nursing care. In fact, statistics indicate 70% of people over 65 end will up needing some form of assistance. The average yearly cost of a private room in a nursing facility is $91,000.
Medicare is designed for an inpatient stay of 90 days or less, after which high daily coinsurance costs kick in. Medicaid requires a spend-down all of assets to poverty level. There are many options to this scenario that you definitely want to consider.
It’s a given that prices will continue to get higher every year—in fact, inflation is part of the Federal Reserve’s monetary policy. Inflation undermines your purchasing power over time. While it’s true if the Consumer Price Index (CPI) rises in a given year, retirees get a COLA (Cost-of-Living Adjustment) increase on their Social Security benefit checks, 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.
4. Excess Withdrawal / Inadequate Income
If your portfolio isn’t structured properly to provide enough income for a long life, you may be 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.
The point of this article is not to inspire fear, but to inspire early, realistic retirement planning to help mitigate your risks.
Please contact your Private Wealth Advisor at Silverhawk, or me, at any time.
Paul J. Mershon,
CFP®, CLU, ChFC, RHU
President, Silverhawk Private Wealth