The odds in favor of longevity are getting better and better. The Institutional Retirement Income Council reports there is a 50 percent chance that at least one member of a couple will live to age 91; a 25 percent chance that at least one member will live to be 95; and a 10 percent chance that at least one of the pair will live to be 99.
Paying the bills for that long takes a lot of money. It makes figuring out a strategy to spend the money you've saved for retirement more difficult than saving it in the first place.
To help its clients avoid running out of money in retirement, Northwestern Mutual has developed a three-part strategy that it believes people who are relying primarily on their savings to finance their retirement should incorporate in their retirement planning. Angela DiCastri, assistant director of personal retirement markets for Northwestern Mutual, outlines these three legs of a do-it-yourself retirement strategy.
A mix of investments with an annuity at the core. Northwestern ran 500 Monte Carlo risk simulations based on a hypothetical 65-year-old couple with $1 million in assets. For this couple to achieve a 90 percent confidence level -- 90 percent of the scenarios give this couple enough money to pay their bills over a lifespan that could see one of them live to 100 -- requires putting $500,000 of their $1 million in an annuity. Income predictability is key, so DiCastri says that if this couple has a significant amount of pension income, an annuity would be less important.
Buy long-term care insurance. Many people think that they don't want long-term care insurance because they believe it is too expensive. Northwestern did Monte Carlo calculations based on predictions by the Society of Actuaries that 32 percent of men and 38 percent of women will need long-term care, with at least half of nursing home stays lasting at least a year.
The calculations showed that unless you have more than $5 million in savings, you'll be financially ahead buying the insurance versus self insuring.
Two years' worth of living expenses in cash. Ready cash will provide you with the income you need to meet your living expenses without having to sell investments in a down market. It also gives you more tax flexibility. Determine the amount you need by subtracting annuities, pensions and Social Security from the total amount required to pay your bills. If you need $100,000 a year to pay the bills, subtract out the $30,000 a year you get from Social Security and the $20,000 from a pension or an annuity. That leaves you needing $50,000 a year in cash -- $100,000 over two years. That's what you should keep in your cash account.
None of this is rocket science, but as DiCastri says, "It will give you the peace of mind that comes with knowing where your next paycheck is coming from."