One of the biggest retirement planning challenges is that we don’t know how long we will live. We are saving up to finance an unknown number of years in retirement. A conservative assumption that many people use is living until age 100. Yet, it’s extremely difficult to save for a retirement that long. For someone who retires at age 65, that’s a 35-year retirement.
Nearly half (48 percent) of Americans approaching retirement have no plans in place to make sure their money lasts the rest of their life, according to a recent Society of Actuaries online survey of 1,006 individuals between ages 45 and 70. Here are a few steps the workers who do have a plan in place are taking to protect themselves from outliving their savings.
Social Security. Social Security provides a guaranteed source of income that will last the rest of your life. Payments are also adjusted to keep up with inflation each year. However, when you claim can make a big difference in the amount of money you will receive in your 90s and beyond. While retirees can start their Social Security payments as early as age 62, payouts increase for each year you delay claiming up until age 70. The Society of Actuaries advises retirees to delay claiming Social Security as long as possible in order to secure higher payments later in life, when going back to work may no longer be an option.
[See The Baby Boomers Turn 65.]
Traditional pension. Workers fortunate enough to receive a traditional pension have another source of income guaranteed to last the rest of their life. However, just 6 percent of the older workers surveyed are counting on this quickly disappearing retirement benefit.
An annuity. Annuities are financial products that guarantee purchasers payments as long as they live. Some 20 percent of older workers plan to use some or all of their nest egg to purchase an annuity or similar type of financial instrument that promises to provide a fixed payment for life.
Medicare supplemental insurance policy. Between deductibles, copays, and coinsurance, many retirees with traditional Medicare find themselves with significant out-of-pocket expenses. Just over a quarter (26 percent) of workers on the verge of retirement plan to purchase a supplemental insurance policy that fills in some of the traditional Medicare coverage gaps or offers additional benefits.
Long-term care insurance. Medicare pays for a maximum of 100 days of nursing home care. After that, retirees must be able to pay for long-term care on their own. Many employees approaching retirement (19 percent) plan to purchase long-term care insurance, typically through a private company or the new national long-term care insurance program, Community Living Assistance Services and Supports (CLASS), created by recent health reform legislation.