This could be the biggest threat to retirees’ financial security
The stock market has been extremely volatile this year, which may worry some retirees about their long-term financial prospects. To be sure, seniors are often advised to maintain a more conservative investment mix than they did in their younger years. But even so, a prolonged period of market turbulence could jeopardize the nest egg of seniors.
While poor stock market performance might seem like a huge risk to older people — perhaps the biggest risk they face — there’s another, more pressing threat that could jeopardize their long-term financial security, a study finds. from the Center for Retirement Research at Boston College. And it’s a threat workers today should take steps to counter.
Americans are living longer
The fact that Americans are living longer these days is a good thing in theory. But from a financial point of view, this represents a challenge.
In fact, many people routinely overlook longevity risk when planning for retirement – the concept of living longer than expected and therefore outliving one’s savings. But it’s important to consider a longer lifespan when planning for retirement. And that means workers today may need to take a different approach than before.
On the one hand, workers should aim to maximize tax-advantaged retirement plans like 401(k)s and IRAs on an annual basis, or get as close to them as possible. But more than that, they should do their best to invest their savings aggressively for maximum growth before moving into safer assets, like bonds, as they approach retirement.
It could also allow workers to deepen their knowledge of annuities, which are a financial product that is often overlooked because they can be complex and difficult to understand. And to be clear, they have their drawbacks. But one of the biggest benefits of owning an annuity is getting guaranteed income for life, no matter how long it lasts.
Maximizing social security is also important. Like annuities, Social Security is designed to pay beneficiaries for the rest of their lives. So, locking in a higher monthly benefit could be the key to achieving long-term financial stability.
Retirees need to be careful with their savings
Those who are still working can take steps to address longevity risk by saving aggressively and aligning the right sources of income. Meanwhile, current retirees need to be careful when dipping into their nest egg to avoid prematurely depleting those funds.
A big piece of advice that’s been around for years is that withdrawing from a retirement plan at a rate of 4% makes it likely that he won’t outlive his savings. But these tips make assumptions about retiree investments and the state of the market that may not be accurate. It also represents 30 years of income from retirement savings and, due to longer lifespans, some older people may need more.
A better bet may be to withdraw more cautiously from savings – say, at a rate of 2% or 3%. This applies particularly to those who leave the labor market earlier and who therefore need to spread their nest egg over a greater number of years.