When you’re nearing retirement or already retired, you probably aren’t too concerned about beating the market every quarter or making the hottest stock picks. You just want enough money to meet your needs. But how do you know if your savings will be sufficient?
Here are the three steps you can take (in under an hour) to improve how your retirement investments are managed:
Step 1: Start with your longevity (time: 10 minutes)
Why it matters: If your primary retirement savings goal is to make your money last, estimating your lifespan helps you plan for how long you’ll need money (your “time horizon”) and how much you can spend every year.
Your expected lifespan should influence many aspects of your financial plan like when you should start taking Social Security and whether it makes sense to buy an annuity. In general, it’s smart to be conservative and plan to live longer than estimates say you will. If you die earlier, you’ll leave some money on the table, but that’s better than dying later than expected and running out of money.
What to do:
Start at the Social Security Administration’s website and look at the “life expectancy” column for your gender. Then, use a free health-based longevity calculator, like one from MetLife, John Hancock or (my favorite) Abaris. (My company, True Link, also includes this calculation as a part of our retirement investing tool.) Record these numbers, along with how long your parents and grandparents lived, and do this for your spouse as well.
The two things you should take away are how long you’re likely to live and whether you’ll be expected to live longer than the Social Security Administration thinks. How long you’ll live affects your time horizon and budget, and whether you’ll outlive expectations affects financial decisions you’ll make. For example, a person who expects to live a long time, other things equal, should take Social Security later, keep IRA distributions low, purchase an annuity (especially a deferred one), choose growth-oriented investments and buy little or no life insurance.