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How Long Are You Prepared to Live? Four Retirement Challenges

Personal Finance

These days, a couple entering retirement at age 65 has a 50% likelihood of one spouse living to age 91 and a 25% likelihood of one spouse living to age 95.

The good news is you may have more time to enjoy all the things you envision for your retirement. The bad news is living longer costs more. But even if you’re retiring as soon as this next year, it’s not too late to prepare for these four longevity challenges:

  1. Inflation. With retirement lasting up to 30 years, it is not enough that retirement savings provide enough income to meet today’s needs. The income also needs to be able to rise as the years go by. With an inflation rate of 3%, your cost of living may double in roughly 24 years. One way to prepare is to continue contributing as much as possible to your retirement accounts during retirement.
  2. Asset Management. Traditionally, one of the main concerns of retirees was market risk, or losing value due to market volatility. With the rise of longevity and inflation, retirees now face the balancing act of hedging against market volatility and being too conservative. The best hedge against long-term inflation is to have some exposure in the equity market.
  3. Retirement Plan Withdrawal Rate. Another key to controlling longevity and inflation risk is to have an appropriate withdrawal rate from retirement accounts. If the withdrawal rate is too high, it will hinder the growth of the principal and thus limit your ability to grow your income. As a general rule of thumb, the optimal withdrawal/distribution rate is 4% increased each year for inflation.
  4. Health Care. Ironically, the same health care advances that drive longevity can also translate into additional cost to you. Current estimates suggest a couple retiring will have close to $220,000 in out-of-pocket health care cost over time. 2

No matter your age, in setting aside funds for your future, it’s best to assume you may live a long time on that income and save accordingly. If you’re a little overwhelmed by these challenges—don’t worry. Smart planning can keep you on the path toward a long and enjoyable retirement. For assistance, contact an AGFinancial representative today at 866.621.1787.

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