Worrying about outliving your money?

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One concern that seniors have is whether they will outlive their income. That concern is called longevity risk. Financial planners have different approaches to this in managing their clients financial decisions. By now we’ve all seen Professor Dan Gilbert as a spokesperson for Prudential talking about making your retirement income last your lifetime. A financial planning shop sent me an email this week saying its planners recommend that you plan to live to be 100. They make an important point in that retirees should plan on living past their expected lifetimes.

The three-legged stool of retirement benefits has you receiving retirement income from: Social Security, a pension and income from a retirement portfolio. For workers that won’t receive a pension, that leaves the stool missing a leg and a little wobbly.

I’ve had experts tell me to think of Social Security benefits as a low-risk bond. I’ve always preferred to think of it as an annuity because, unlike a bond, there’s no payout at the end, unless you want to count the Social Security death benefit — currently $255.

Optimizing the retiree’s Social Security payments can help manage longevity risk. I encourage couples to choose a strategy that maximizes their expected combined benefits over their lifetimes. The optimal filing strategy for singles is more straightforward, but there needs to be a compelling reason to file before the worker reaches full retirement age.

Using part of your retirement savings to allow you to delay filing for Social Security benefits front loads withdrawals from your retirement portfolio. Purchasing a term fixed annuity contract can provide the retirement income stream until full retirement, or until age 70 if the retiree wants to also earn delayed retirement credits.

The worry of the retirement portfolio being exhausted while still needing retirement income has retirees limiting withdrawal rates out of the portfolio, making lifestyle sacrifices to err on the side of caution. An annuity can be the answer in this situation as well — in this case, a deferred fixed annuity that would kick in at a later age and start making monthly payments.

This can be an effective financial backstop to the worry of your retirement nest egg being depleted by a certain age. The longer the deferral to receive this annuity, the less expensive it is in today’s dollars. One worry that investors have when buying this type of deferred annuity is they die before they reach the age where the income payments start. There are options in the annuity contract to make sure that a beneficiary would receive a death benefit or annuity payment in the effect of the contract owner dies prior to annuitization. Contract options are never free but can be worth it to seniors that can’t commit to the annuity because they worry they’ll die before they receive any of the income stream. I’ve purposely avoided a discussion variable annuities in this post.

Reverse mortgages can also provide a financial backstop. The appropriate timing and use of this product by seniors is complicated. There’s a cadre of planning professionals that look at this as a last resort, while others make the argument to use early to enable the retiree to postpone filing for Social Security benefits or delay withdrawing money from the retirement portfolio. Odds are the particulars of your financial situation will influence any timing decision; that’s why they call it personal finance. I’ll spend more time on reverse mortgages in future blog posts.

Read more on the topic: 5 ays to make retirement savings last

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