Longevity is a Real Fear: Living Too Long in Retirement With life spans increasing, older Americans and their advisors must figure out how to make their retirement dollars stretch further.

By V. Raymond Ferrara, CFP®

NUMBER 79 / VOL. 2, 2020

www.csa.us Copyright 2020 Society of Certified Senior Advisors

With life spans increasing, older Americans and their advisors must figure out how to make their retirement dollars stretch further. BY V. R AYMOND FERR AR A , CFP ®

Longevity is a Real Fear; Living Too Long in Retirement

Only two generations ago, retirement was short and simple. Retirement began at sixty-five with a pension and a little Social Security

and then the retiree was deceased within the next ten years. The guarantee of a pension and Social Security, combined with a small savings account generally in-vested in CDs at the neighborhood bank, was all that was expected or needed. Many had built enough eq-uity in the value of their house, often with the mort-gage paid off, to sell the home and move, usually to a sunny, warm place.

However, something happened in the span of a short seventy years. People started living longer. When the first of the baby boomers were born in 1946, the life expectancy of a male was 64.4 years and for a fe-male, 69.4 years (Social Security Online, n.d.). Today those boomers are approaching seventy-three having

outlived birth life expectancy, and they can look for-ward to an average life expectancy of another 12.43 years for a male and 14.37 years for a female (Annuity Advantage, 2019). A couple aged seventy-three years has an average joint life expectancy of another twenty years (PGCalc, 2005).

Keep in mind that these are averages, which means some will live longer. Those with financial resources, a healthier lifestyle, and access to good health care might easily find that age one hundred is not out of reach. Advances in medicine over the next twenty years will likely give an additional boost to longev-ity. Where financial advisers once conservatively pro-jected death in a financial plan at ninety, that age has increased to ninety-five in most situations, and one hundred is becoming the new standard.

In talking with seniors who have retired over the

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CSA JOURNAL 79 / VOL. 2, 2020 / SOCIETY OF CERTIFIED SENIOR ADVISORS / WWW.CSA.US PAGE 11

past thirty years, the single biggest concern, besides good health and mental capacity, is a fear of outliving the available income and assets. The last thing they want is to become dependent on children and/or so-ciety. This is a real risk for everyone in retirement, but especially for those who have no retirement plan and are essentially “winging it.”

When Should You Start Planning?The obvious answer is the sooner the better. It is never too early, and no amount of monthly savings is ever too small to start. Actually, starting the habit of saving and keeping the money saved is more important than the dollar amount in the beginning. Saving $500 per month starting at age twenty-five with an assumed re-turn of 6 percent after tax creates a nest egg just short of $1 million by age sixty-five. Wait ten years and start at age thirty-five, and it will take saving almost $1,000 per month to reach the same goal.

No matter how young or old you might be, every-one needs a written financial plan. For some, a single page is all that is required, but others need signifi-cantly more detail. Would you build a home without a set of architectural drawings? Would a doctor per-form surgery or a lawyer go to trial without a written plan? Of course not. Why? Because they realize the desired outcome has a greater chance of occurring with a plan than without one. The first step toward having sufficient retirement assets is to have a written retirement plan.

At a minimum, the plan should include a net worth statement, cash flow projection (income and ex-penses), risk tolerance assessment, analysis of current investments with recommended changes, a discussion of the cost/benefits of long-term care insurance, and an evaluation of the estate plan, including a review of the legal documents.

In order to work with a competent and ethical financial planner, seek out a Certified Financial Plan-ner™ (CFP®) who is required to work as a fiduciary when providing financial advice. A fiduciary must

provide the duty and loyalty of always working in the client’s best interest. See the resource section, below, for a link on where to find a CFP®.

ExpensesThere are two categories of expenses: non-discre-tionary (needs) and discretionary (wants). Non-dis-cretionary (fixed) expenses are those that occur on a regular basis and are required. Examples are housing, utilities, insurance, taxes, and medical costs. Discre-tionary (variable) expenses are those desired, but not necessary, such as travel, dining out, country club or health club dues, or charitable giving. Non-discretion-ary expenses will often increase over time, especially for health and long-term care, while discretionary expenses typically decrease with age.

A best practice is to match non-discretionary ex-penses with fixed and predictable income like Social Security, annuities, and pensions. This will likely pro-vide some peace of mind. To the extent possible, use variable and unpredictable income like investments for discretionary expenses. Thus, as variable income changes, so can the discretionary expenses.

When planning expenses, keep in mind that not all expenses happen every year. There will be repairs to the house, a new car, and other unexpected costs from time to time. These too must be anticipated in cash flow planning.

Managing income tax expense is always a concern; it is especially important during retirement. Some investments will grow tax-deferred (annuities, IRAs) until you withdraw the money, while others might grow tax-free (Roth IRAs, municipal bonds). Using a traditional IRA for charitable contributions after age seventy and a half keeps these distributions up to $100,000 non-taxable while satisfying a portion of the federally mandated required minimum distribu-tion (RMD) after age seventy-two. Too much income can make Social Security benefits taxable and increase premiums for Medicare. Discuss these and other op-tions with financial advisers.

Income SourcesRetiring at sixty-five and living to ninety-five means needing income for 10,950 days. That is thirty years of no longer working for money, but needing your money to work for you. Consider whether any of the income is guaranteed and/or inflation adjusted. Every dollar of expense today will be $2.10 in thirty years at 2.5 percent inflation. How will income needs change over time?

What are the various sources of income? So-cial Security, pension, 401(k), IRA, life insurance,

Would you build a home without a

set of architectural drawings? Would

a doctor perform surgery or a lawyer

go to trial without a written plan?

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certificates of deposit (CDs), annuities, other invest-ments, and real estate are those that are most com-mon. Another major source is wages as many choose to continue working, or must continue working, to afford their lifestyle.

Is seventy or seventy-five the new sixty-five? In a 2017 study, AARP implies that 20 percent of individ-uals over the age of sixty plan to keep working forever (Palmer, 2017). While working into one’s eighties or nineties might seem reasonable to someone in his or her sixties, life has a way of getting in the way. What happens if health fails, or family issues arise? What if a spouse is in need of a caregiver? Thus, working forever is likely an option for only a few.

Social Security is an important source of income for most older Americans. For nearly half of older adults, it is the main source of income, and it repre-sents fully 90 percent of income for about one in four (Center on Budget and Policy Priorities, 2019). It is first available at age sixty-two. While many need So-cial Security at this age, it is usually best to wait as long as possible, especially if in good health, because the amount rises approximately 8 percent for every year someone waits, up to age seventy. According to the Social Security quick calculator, an individual earn-ing $75,000 at retirement will have a $1,412 monthly benefit at age sixty-two, but it will increase to $2,742 if delayed to age seventy.

Income PlanningWe have already covered Social Security and working as options, but what other approaches exist? When the baby boomers’ parents and grandparents retired, many of them had guaranteed pensions, but not so many do today. How is guaranteed fixed income cre-ated today?

Annuities are becoming increasingly utilized and accepted. Fixed annuities come in a variety of forms. They provide guaranteed income for a specific period of time, i.e. five, ten, or twenty years, or throughout a lifetime. The longer the payout, the lower the monthly payment for the same lump sum invested. While of-ten issued on an individual basis, they are also offered to cover both spouses. When considering this option, it’s best to get bids from several insurance companies that are “A” rated or higher. Be careful with any annu-ity where surrender charges are greater than 5 percent and/or last longer than seven years.

Other sources of fixed income include life insur-ance, CDs, and bonds. Withdrawals from a life in-surance policy that has been owned for many years may come with some tax advantages. Today, interest rates for both CDs and bonds are low by historical

standards, but this is likely to change over time. Consider creating a “ladder” by dividing the CD or

bond investments into at least four different segments. Take an equal percentage of funds and invest each portion in products that mature at different times. As an example, buy segments for one, two, three, and four years of maturity. As each segment comes due, pur-chase a new segment that will mature in four years. In addition to potentially reducing interest rate risk, this approach provides 25 percent liquidity every year.

A slightly different version of this approach is to place the money into different “buckets” using a vari-ety of investments. Here’s an example: the first bucket will contain a five-year immediate annuity for guar-anteed income. The second bucket will be comprised entirely of bonds that mature in five years. The third bucket will have 50 percent bonds and 50 percent stocks, while the fourth bucket has 25 percent bonds and 75 percent stocks. The final bucket will contain 100 percent stocks. When the annuity expires in five years, use the next bucket to purchase another im-mediate annuity for another five years of income and so on. If you do not need to use all of the money to purchase the desired annuity, then divide it equally among the remaining buckets. Using stocks in those buckets of ten years or more will likely provide some protection against the rate of inflation due to greater growth potential.

As a general rule, withdrawing more than 3 per-cent of the investment portfolio between ages sixty and sixty-nine, 4 percent between ages seventy to seventy-nine, and 5 percent thereafter adds significant risk to outliving the assets. Further, it is advisable to have more dividend-paying stocks in the portfolio at retirement than growth stocks, as the dividend stocks usually perform better during down markets. Finally, do not take any more risk in the investment portfolio than is necessary to support the desired lifestyle. It is no longer about making as much as possible, it is about keeping as much as possible.

As a last alternative, explore the use of a reverse mortgage, which is available after the age of sixty-two. This is a way to unlock the equity in a home without forcing the owner to move out. Obtain bids from sev-eral companies as costs and terms vary.

Long-Term Care PlanningWith an aging population, the odds increase that long-term care services will be needed. In 2019, there were 1.2 million older adults served in nursing homes, while 6.7 million were cared for in a private home. By age group, 8 percent of those between ages sixty-five and seventy-four, 17 percent between ages

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seventy-five and eighty-four, and 42 percent of those eighty-five and older needed these services. Women account for 59 percent of long-term care insurance claims, while men use 41 percent, although the dif-ference between these numbers is narrowing along with longevity gaps between the sexes. Home health services represent 51 percent of all insurance claims (American Association, n.d.).

There are two ways to address this issue from a fi-nancial standpoint: self-insurance and long-term care insurance. For those with sufficient financial resourc-es, self-insurance is often the best solution. However, for many without insurance, long-term care needs can cause a financial disaster.

Medicare only provides for long-term care when skilled care is needed within thirty days after being hospitalized for at least three nights. Even then, 100 percent coverage is limited to the first twenty days. After that, Medicare requires a co-payment of $176 daily (Medicare.gov., 2020) for days twenty-one through one hundred. After one hundred days, there is no coverage.

Medicaid provides coverage only for the most needy and the rules vary by state based on income and assets. Please visit with an elder law attorney to learn more.

Long-term care insurance benefits are available for home care and for a long-term care facility. Terms, conditions, riders, and benefits will vary. Premiums are lower the younger this insurance is obtained, but premiums are not guaranteed and can be changed in the future. This can come as a big surprise and eventu-ally force policyholders to drop the insurance just at the time they might need it. Like casualty insurance, it only pays if something happens, so many will just roll the dice and keep fingers crossed that it does not happen to them.

To overcome this objection, some companies offer life insurance policies that will prepay the death ben-efit for long-term care. Other companies offer annui-ties that will do the same and may carry tax benefits. Explore all insurance options with a qualified agent.

In-home care is the preferred option in most situations, as it is often less expensive when limited services are required. A spouse and/or family member is often providing care in lieu of paid assistance. In-home care is more personalized, the opportunities for socialization are better, and it tends to provide greater independence. However, full-time care is easily more expensive, approaching $20,000 per month (Ameri-can Association, n.d.).

This is exacerbated by a crisis in the decreasing number of caregivers available while the demand is increasing due to longevity. Caregivers are generally

low paid, have little or no benefits, and serve long, hard hours. The economy is providing caregivers with better and less demanding opportunities in other jobs. Thus, even more family members are pressed into service, which affects their wages, retirement savings, and health.

ConclusionThe challenges presented by increasing longevity are numerous and too big to ignore. They cause financial, emotional, and health turmoil. Developing a tailored, written financial plan with a CFP® professional is a major step to help achieve a successful and satisfying retirement. •CSA

V. Raymond Ferrara, CFP®, is chairman and CEO of ProVise Management Group, LLC located in Clear-water, Florida. ProVise is a full-service financial planning firm which is a registered investment advi-

sor with the Securities and Exchange Commission and one of the largest financial planning firms in the country, with $1.5 billion in assets under management as of December 2019. Ray served on the board of directors for the CFP® Board of Standards, Inc. and was Chair of the Board in 2014. He is a sought-after speaker and has been quoted in numerous publications, including USA Today, The New York Times, The Wall Street Journal, Barron’s, Tampa Bay Times, and Business Week.

■ RESOURCESTo find a directory of CFP® professionals, visit www.cfp.net.

■ REFERENCESAmerican Association for Long-Term Care Insurance. (n.d.). Long-term

care insurance facts - data - statistics - 2019 report. Retrieved from www.AALTCI.org/LTCFacts-2019

Annuity Advantage. (2019, June 13). Life expectancy tables. Retrieved from https://www.annuityadvantage.com/resources/life-expectancy-tables/

Center on Budget and Policy Priorities. (2019). Top ten facts about Social Security. Retrieved from https://www.cbpp.org/sites/default/files/atoms/files/8-8-16socsec.pdf

Medicare.gov. (2020). Skilled nursing facility (SNF) care. Retrieved from https://www.medicare.gov/coverage/skilled-nursing-facility-snf-care

Palmer, K. (2017, March 31). Is 70 the new 65? Retrieved from https://www.aarp.org/work/on-the-job/info-2017/workers-not-retiring-fd.html

PGCalc. (2005). Male/Female joint life expectancies based on annuity 2000 mortality table. Retrieved from https://www.pgcalc.com/pdf/twolife.pdf

Social Security Online. (n.d.). Cohort life expectancy. Retrieved from https://www.ssa.gov/OACT/TR/2011/lr5a4.html

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