Will You Outlive Your Money?

juggleThe question in this week’s Struming is one which people, young and old and rich and poor, should be asking themselves. For the young who are not really fixated on the issue, there’s lots of time to accelerate a savings plan and the power of compounded savings for a Millennial is the best tool (see The Rule of 72)

But for those who are the back nine of their employment, or have entered retirement, the question about whether the money will last is one worthy of deeper thought. Interestingly, it was not a question our parents asked nearly as much for two important reasons:

1. At best, they assumed they would be fortunate to live into their 70s and incredibly fortunate to reach their 80s.

2. Those who worked for the “company” for their careers, as many did, had pensions to provide a financial cushion in their senior years.

So what’s changed? Plenty

1. First and most importantly, we are living longer. That’s good. On average, a 65 year old can expect to live roughly 20 more years, or maybe more. But with longevity comes greater and longer financial needs.

2. Pensions? What’s a pension? If you’re not a government worker it’s unlikely that you have a pension.

3. The younger “healthier” adult in their 60s and 70s wants a life of leisure, travel, activities, and that takes $. That may or may not be realistic given one’s financial position.

So what should someone 50+ be thinking and doing now to plan for the future:

1. Save. Save. Save. Max out your 401(k) to the degree you are able if you’re employed. And obviously be sure to save enough to trigger the company match, if there is one. That’s FREE money.

2. Have a plan for the future. Do the math about your wealth at various points in life and your needs. Be realistic.

3. Assume far more money for healthcare costs than you’ve planned

4. Consider long term care insurance. It’s not costly in your 50s and could provide a hedge against big costs in the future. Know that Medicare does not cover nursing care.

5. Consider a deferred income annuity Basically a buyer deposits a bunch of money today with an insurance company for a guaranteed deferred stream of income starting at a future time.  I know annuities are complex and confusing, but the concept of guaranteeing a stream of income for life is exactly the kind of strategy that provides comfort that you won’t outlive your money. The details are way beyond my pay grade but the concept is solid.

6. Be realistic about how long you may work. Will you really “work till you drop”? That’s not likely since your health or a decision by your employer, could change this assumption quickly.

7. Do your homework on social security strategies. It’s complex. But if you are able to and are in good health waiting to collect until you are 70 is a smart strategy. But be realistic about how much social security really provides.

Most importantly develop a plan and if you need someone to help develop the models, then get help. Make reasonable assumptions on your net worth, expenses and see how long the money lasts and examine your assumptions about how much (if any) you seek to leave to family.

“Man plans, God laughs”. Yes, perhaps the saying is true. But not having a plan can put your family in financial jeopardy. And if you’re fortunate enough to live a long healthy life, the need for financial planning is paramount. You would be doing a mitzvah for your family. Don’t put if off.

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