Why many people will outlive their money in retirement and what they can do to prevent that scary scenario.
5 min read
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My 95-year-old mother-in-law is one person I never suspected would run out of money, but thatâs exactly whatâs happening.
When her husband died, she received a life insurance settlement, and she’s received a nice pension payout every year since, taking care to preserve that pension by livingÂ a frugal lifestyle. Still, the assisted-living facility where she lives raises the rent every year — more than the increases in her pension and social security. And, something else: She’s living longer than everyone expected.
In fact, sheâs still going strong and could easily live another five years or more — that’s wonderful news. And, thankfully, our family is prepared to help if, as appears likely, her living expenses exceed her income. But it’s that very scenario of having your living expenses exceed your income, that needs people’s attention, because it’s happening more and more.
One big cause is the big mistake people, including entrepreneurs, make in planning for retirement. They understimateÂ how long they will live.Â In fact, nearly half of pre-retirees and retirees underestimate how long theyâll live by five years or more, according to surveys by the Society of Actuaries.
One reason why is that too many people predict their lengthÂ of longevityÂ based on arbitrary factors, such as the assumption of an âaverageâ lifespan. Thatâs a big problem when it comes to making sure your money lasts as long as you do.
Very few of those surveyed, apparently, understoodÂ how variable life expectancy can be. Whatever the statistics say is the average life span for someone of your age and gender, you have a 50 percent chance of living longer than that age.
By the time men reach age 65, those with average health have a 40 percent chance of living to age 85,Â while women in this group have more than a 50 percent chance of living that long. If, on top of this, men areÂ healthier than average, they’ve got a 50 percent chance of living to age 85; and women have aÂ 62 percent chance. Well-educated people tend to live longer than average, too.
And thoseÂ turning 65 today? SomeÂ 25 percent will live past 90, and one out of 10 will live past 95, according to the Social Security Administration.
Yet while longevity is an obvious gift, finances can be tricky. IfÂ youâre the lucky one who hangs on until age 100 or longer, you probably wonât feel so lucky if you canât provide for yourself in those final years.
Most people surveyed say their first line of defense is to reduce their expenditures significantly. How sad! To work hard all your life and end up having to scrimp and sacrifice just to get by!
Almost as many people surveyed said they would return to work or work more hours than they currently do if they foundÂ themselves running out of money. But thatâs easier said than done:Â New data analysis by ProPublica and the Urban Institute shows that more than half of older US workers are pushed out of longtime jobs before they choose to retire, thereby suffering financial damage that is often irreversible.
Others have to stop working sooner than they’d planned due to health problems, disability or the needÂ to take care of a loved one, according to the Employee Benefits Research Institute.
Longevity is one of the biggest questions we all face in determining how much to save for retirement. Therefore, it pays to make conservative assumptions, both when you’re considering your potential life expectancy and when you’re planning how much money you’ll need to see you through. For instance, you should plan on withdrawing no more than 2.8 percent of your retirement savings each year. Anything more significantly increases your chances of running out of money, current studies show.
Many people look at the numbers facing them, and they get so worried, discouragedÂ or scared that they fail to act. Donât let that be you. Ignoring the problem will not make it go away. And the longer you wait to get serious about it, the more hopeless youâll feel.
By starting now, you’ll have more choices and more future freedom.Â For instance, by choosing to save more and forgo certain expenditures while you are still working, you can increase your wealth and the options youâll have later about how to spend it.
Of course, if youÂ knew exactly how long you were going to live, planning for retirement would be a simple matter. But since you canât know that, why not plan as if youÂ are going to live until 100? The peace of mind youâll gain will give you an incentive to keep building your financial security. And when you’re age 75, 80, 90Â or even older — and still very much alive — you’llÂ be glad you did.