Hedging Against Our Longevity

Each of my parents’ 11 siblings lived well into their late 80s, and many lived into their 90s.

The last one passed away just last month, at the age of 94. And up until two months ago, she was still going out to dinner and still enjoying wine.

By contrast, her parents both died in their 30s. It was 1929, and they left six children behind.

Today, the cancer and heart disease that caused their deaths would have been treatable. And they would have likely lived much longer lives.

Thanks to better diets (or at least better advice about our diets), improved living conditions and the latest Star Trek-like medical cures, we are living a whole lot longer than our parents’ generation.

In fact, a recent study indicates that the number of people living into their 90s has tripled since 1980. And it’s expected to quadruple over the next 40 years.

That means longer retirements – much longer than most of us ever considered.

The Longevity Dilemma

The problem is that genes like mine make it a very long and costly proposition.

Retirees are left with a very taxing question: As life expectancies go off the charts, how do we fund retirements that will likely run into our 90s and beyond?

These new significantly longer life expectancies require us to actually hedge against our own longevity. That means we need to plan out reliable, steady and sustainable income sources.

It leave us with three options.

A Dying Breed: Pension Plans

Today they’re often called “defined benefit” plans. With this kind of plan, your employer puts money aside on your behalf in a plan that is managed for you. You have no input into how it is handled. After you retire, you receive a check every month, in most cases for life.

While these kinds of mandatory managed plans have fallen out of popularity, they could sure help solve the retirement crisis we face today. But almost no one has a traditional pension anymore, not the kind our parents had.

The good news is, if you have funded your IRA and 401(k) accounts, you can set them up to act as a monthly pension. This way, you receive an allocated portion of monthly income from your investments. Just get the help of a retirement planner to make sure your plan is designed to go the distance.

A Supplement From the Government

Social Security, by design, is the best sustainable income plan available… but for many, it’s their primary (or only) source of retirement income.

Despite its many funding issues, Social Security will pay you an income for life. Plus, it has historically offered annual increases for inflation. That’s what a sustainable income plan should look like.

The problem, though, is that the average check is only $1,200 a month. That’s not nearly enough for most folks to rely on as a primary source of income. And it puts most of us at the poverty level for all of our retirement. That is no way to finish this horse race.

That leaves one final, unique option. It’s not for everyone, but it’s at least worth considering.

A Reliable but Unconventional Solution

Annuities may be costly, but you should at least consider the positives before you dismiss the idea.

No matter how much or how little you have saved, there is an annuity option that can provide income for life. The amount of income, of course, is a function of how much cash you can commit.

But keep in mind that sustainable income isn’t just about how much you receive. It’s also about how long you receive it and the reliability of the payments.

That’s where annuities offer an advantage.

Payouts may be legally described as “guaranteed” income. Government-backed Treasurys and FDIC-insured investments are the only other options that can legally use the word “guarantee.”

If you go about selecting an annuity the right way, and you choose one that fits with your retirement goals, it will simplify your life tremendously. Knowing there is guaranteed income arriving every month can take a lot of pressure off you and make life a lot better.

There are also significant tax savings that come with some annuities, especially if you use nonretirement or nonqualified money. How much you can save depends on when you start receiving annuity payments.

Are there drawbacks to annuities? Of course. Insurance companies are there to make money, not give it away. There has to be a cost associated with “guaranteed” income.

But when you weigh the costs against the benefits of a guarantee, it reduces the possibility that you’ll go broke in your 80s. And that is something that deserves serious consideration.

If you make it to age 65, there is a very good chance you’re going to be here until you’re 90. And that’s a lot of years’ worth of monthly bills.

The best plan of attack is to diversify and set up income streams from many different sources, so you’re never stuck relying on just one. And when you’re selecting income investments, if you can prioritize sustainability, you’ll be better equipped to handle planned and unplanned expenses in retirement.