Will your savings last throughout your retirement? Many Americans have not even thought about the answer to that question. Among those who have, far too many will answer “no.”
Indeed, with the decline of defined benefit plans and more Americans managing their own nest eggs, one of the growing challenges is how to make sure that people’s retirement assets can provide sufficient income for the duration of their golden years. At the Bipartisan Policy Center (BPC), we are hosting an event entitled “Making Your 401(k) Last: The Challenge of Lifetime Income in Defined Contribution Plans“ on this topic on Wednesday, April 1.
Projections from the Employee Benefit Research Institute (EBRI) show that the majority of middle-income Americans who live the longest will run short of money in retirement.1 And the numbers suggest that longevity risk is hitting higher earners hard as well. Some of those individuals fail to save sufficiently over the course of their careers. But even those who amass large sums may not be managing their resources in a way that maximizes the likelihood of a secure retirement.
Aside from simply increasing your savings, here are some ways to improve the odds of maintaining your standard of living throughout retirement:
1. Better understand your financial situation. For starters, take a holistic view of the retirement nest egg that you have built to date. That means adding up any savings and pension assets that you have socked away and weighing them against your likely consumption needs. Plenty of online tools and mobile apps are available to help you get organized and do the retirement math. EBRI’s Ballpark E$timate is a good place to start.
2. Consider options that can provide a stream of income during retirement. Many approaches can generate regular income to supplement your Social Security benefits. Annuities, for example, can provide you with a guaranteed monthly income for life in exchange for an upfront sum. Other options include making systematic withdrawals from your retirement account or tapping home equity through what’s known as a reverse mortgage. But these products can be complex and may or may not be appropriate for your situation. They all carry fees, which vary widely. But if you carefully consider the options ? and consult with experts, when appropriate ? you may find an approach that meets your needs.
3. If possible, delay retirement to collect more generous Social Security benefits. Working a few years longer or relying on your personal savings earlier in retirement may enable you to boost the size of your Social Security check later in life. For each additional year a person waits to claim benefits beyond full retirement age (66 for those newly eligible today) until age 70, monthly benefits increase by 8 percent for life. And for those who are considering claiming their Social Security benefits at age 62, remember that your monthly benefits might be as much as 30 percent less than what you would receive at full retirement age, again, for life.
While health care for most seniors is covered by Medicare, premiums and cost-sharing can be substantial. One potential approach, if you are eligible, is to contribute to a Health Savings Account during your career, which can offer tax advantages for paying these costs even into your retirement years.
It’s not a problem for everyone, but when long-term care is needed, the bills quickly add up for many retirees since these expenses are not covered by Medicare. Of a cohort of 65-year-old Americans, approximately 16 percent will use more than $100,000 in paid long-term services and supports. Medicaid will only cover such expenses after individuals have exhausted the vast majority of their non-housing assets. Long-term care insurance can be a good way for many Americans to protect their retirement security from this risk.
These planning tips are just a start on how you can take a “pot of money” that you have saved and stretch it to meet your needs throughout retirement. BPC’s public event on Wednesday, April 1 at 10:00AM EDT will focus on barriers to broader use of lifetime income products and potential policy solutions.
This is part of the important work of BPC’s Commission on Retirement Security and Personal Savings. It also complements the efforts of BPC’s Long-Term Care Initiative, which hosted an event examining longevity and long-term care risk last fall. These two groups are developing recommendations with the goal of improving the financial security of working Americans for the entirety of their lives.
Specifically, EBRI projects that, of Baby Boomers and Gen Xers with average longevity, 52.6 percent of those in the second-income quartile and 71.7 percent in the third-income quartile will not run short of money during retirement. But of those Boomers and Gen Xers in the latest quartile of longevity, only 20.3 percent in the second-income quartile and 44.9 percent in the third-income quartile will not run short of money during retirement. These results suggest that solutions to the lifetime income challenge have the potential to greatly improve the financial security of middle-class Americans in retirement.