The first issue of a new UBS publication, Your Wealth & Life, focuses on “Navigating longevity,” or how to make sure your savings and investments last as long as you do. This is especially important as our odds of living long — and long after retirement — increase. Half of today’s 65-year-olds will live to 85 or older; women have almost a one in three chance of living to age 90; and for a couple there’s a 50% chance that one of the spouses will live to age 90 or beyond.
This means that if you retire at age 65, unless you know for health reasons that your life expectancy is shorter than average, you need to have enough savings or guaranteed income to last 30 years, which is a long time by any measure. Here are a few tips from the UBS report to make this work:
- Withdraw 4% Plus. The first is that you may in fact be able to spend more of your savings than you anticipated. Often retirees are advised that they can safely withdraw 4% of their portfolio in year one and increase this amount by the inflation rate each year. So, if a new retiree has a $1 million portfolio, she can safely withdraw $40,000 in year one. If the inflation rate that year is 3%, then in year two she can withdraw and spend $41,200, and so on. The good news is that this is too conservative and that the retiree can withdraw more based on the performance of her investment portfolio. Michael Crook, Head of Portfolio & Planning Research for UBS, recommends withdrawals at what he calls the “dynamic safe depletion rate” (DSDR), which would permit greater withdrawal rates based on the retiree’s age and likely lifespan. While a 65-year-old would stick with the 4% rule, a 75-year-old could safely withdraw 4.8% of her savings and investments.
The retiree under this approach would likely have significantly more spending money, assuming that her investment portfolio grows faster than inflation. At age 75 she would be withdrawing almost 5% of a larger amount. The losers, however, would be her heirs. Based on average investment returns between 1963 and 2013, a retiree following the 4% rule would more or less double the value of her portfolio in real dollars after 30 years, leaving $2 million (inflation adjusted) to her heirs. By following the DSDR scheme, the heirs would only receive about $800,000 (inflation adjusted) after 30 years, 60% less. Retirees must balance their own lifestyle desires with their wish to leave something to their heirs.
Also, whether the DSDR plan really permits increased spending depends on the timing of retirement. Retirees will do much better if they retire in a rising market than in a falling one. According to Cook, someone retiring in 1968 would do no better than the usual 4% rule under his plan, while those retiring in 1992 would be able to withdraw twice as much after 10 years and those retiring in 1985 could withdraw more than three times as much after 15 years.
Full retirement age for Social Security is 66. Beneficiaries can begin taking a lower benefit at age 62 or delay retirement and take a higher benefit at age 70. Whatever choice a beneficiary takes will follow him the rest of his life. By waiting until age 70, you will receive 32% more every year for the rest of your life, a huge raise. Of course, you will give up four years of benefits, but this is a good trade off if what we’re concerned about is outliving our money. For a beneficiary who is entitled to $2,000 a month of benefits at age 66, waiting four years will mean the loss of $96,000. With the new benefit of $2,640 a month beginning at age 70, 12 and half years to make up the difference. But beginning at age 82 and a half and going forward for the rest of the retiree’s life, he will be substantially better off having postponed taking Social Security. This benefit increases over time as annual cost of living increases are calculated on a larger base. There is no cheaper longevity protection than delayed Social Security retirement. And married couples can often mitigate the loss of four years of benefits through the “file and suspend” method which permits one spouse to begin taking benefits at age 66. Click here for an explanation of the file and suspend strategy by The AARP.