As life expectancy rises, longevity planning is an essential yet often overlooked aspect of financial planning. Here’s how to turn the challenge of increased longevity into secure and prosperous golden years.
Longevity is a gift. It provides those of us fortunate enough to be blessed with extra years additional opportunities to enjoy life’s pleasures, spend more time with loved ones, and explore new hobbies and interests. However, along with this gift can come an unexpected challenge: having the necessary financial means to comfortably fund those extra years of life.
The reality is that increased life expectancy comes with significant financial implications. Retirement savings need to last longer — potentially much longer than anticipated — and without proper planning, you could outlive your savings, leading to significant financial stress. That’s where longevity planning comes in — and it’s never too soon to start. Whether you’re already retired, approaching retirement, or at the early stages of your career, managing and reviewing your plan will have long-term benefits for you and your family.
What is longevity planning?
Longevity planning is the process of preparing for an extended lifespan. It focuses on creating financial strategies that help you maintain your desired lifestyle for as long as you live. It involves assessing your current financial situation, projecting future expenses, and developing a plan that supports your financial well-being throughout an extended time frame. Financial security isn’t the only consideration. Equally important is your peace of mind. Having a plan in place can alleviate stress and uncertainty, allowing you to fully enjoy your retirement years.
Having a plan in place can alleviate stress and uncertainty, allowing you to fully enjoy your retirement years.
Key components of longevity planning
As with all financial planning, longevity planning isn’t a one-size-fits-all approach. It’s a comprehensive process that involves several key components, each playing a crucial role in securing your financial future.
Your current financial situation: The starting point is a complete understanding of your current financial situation. This involves a thorough review of your cash flow (income, savings, investments, and expenses) as well as your personal balance sheet. It’s essential to have a clear picture of where you stand financially to plan effectively for the future.
Investment management: Longer life expectancies mean more years in retirement, which in turn requires more resources. Accordingly, your investment portfolio needs to be structured in a way that can support a longer retirement period consistent with your overall goals and risk tolerance. This calls for a review of your portfolio’s diversification strategy: looking at the balance of equities and nontraditional investments against a mix of more stable assets (like cash and equivalents) and fixed-income assets (like bonds) that can offer some stability during periods of market volatility.
Healthcare costs: As you age, healthcare becomes a significant concern, from both wellness and financial perspectives. With advancing age, healthcare costs can escalate rapidly. Therefore, it’s critical to factor in potential healthcare costs and verify you have adequate insurance or savings to cover these expenses for an extended period. Developing a “needs analysis” is an important step to assess proper coverage, either through an insurance instrument, such as long-term care insurance, or your own personal savings.
Inflation protection: Inflation slowly chips away at your wealth. Over an extended period, it can significantly reduce your purchasing power, especially if you’re on a fixed income. However, history has shown us that a well-diversified portfolio with equity exposure can potentially keep pace with — or even outperform — the rate of inflation. Another source of inflation protection is Social Security, which has an annual inflation-adjustment component. But relying solely on Social Security for your inflation adjustment in retirement is not likely to keep pace with higher-inflated costs like healthcare expenses.
Strategies for longevity planning
Now that you understand the elements of longevity planning, how can you incorporate them into your plan? Here are some strategies to consider.
Understand your budget: Spending habits become increasingly important as you age, so understanding your income, expenses for essentials, and discretionary spending will help you plan for rising costs and adjust your budget to accommodate longevity-related costs.
Boost your savings rate: It sounds simple, but a strong savings plan can play a huge role if you start early enough. The more you save now, while still maintaining a balanced lifestyle, the more you’ll have in retirement. Consider increasing your savings rate incrementally each year, especially if you’re still in the early stages of your career.
Diversify your investments: Diversifying your investments across different asset classes — for example, stocks, bonds, and real estate — can help you reduce overall risk and enhance long-term returns. Each asset class has its own risk profile, and diversification helps spread risk across assets so if one asset class performs poorly, others may help offset any losses. Diversification can also provide multiple income streams via dividends, interest, rental income, etc., helping to balance near-term liquidity needs with long-term growth. A diversified portfolio also provides maximum flexibility to adapt to ever-changing circumstances.
Protect against inflation: Adding an inflation adjustment to your financial projections can help forecast the impact on your purchasing power down the road. Investing in assets that historically outpace inflation, such as stocks and real estate, can help maintain purchasing power over time while providing growth potential. For investors seeking to avoid capital market risk, options like inflation-adjusted annuities can help provide an income “floor” in retirement. However, keep in mind that there’s a cost to that protection, so it’s very important to work with an independent advisor to carefully evaluate these options.
Plan your estate: A well-thought-out and executed estate plan can create peace of mind for you and a lasting legacy for your heirs. It ensures someone of your choosing can step in for you in the event of your incapacity, and it specifies how your assets should be distributed upon your passing. In some cases, a trust can be used to help protect your assets, avoid probate, and allow for an efficient transfer of wealth. Be sure to revisit your estate plan periodically to confirm the designations you have in place are still in line with your wishes.
Optimize Social Security benefits: Explore the pros and cons of delaying your Social Security benefits. While it’s possible to start collecting as early as age 62, this choice comes with a permanent reduction to your benefit. Waiting until at least full retirement age or longer (up to age 70) will yield a higher benefit. If health and finances are on your side and you want maximum flexibility in the future, waiting to collect Social Security can provide a higher lifetime benefit when you might need it most.
Plan your healthcare needs: Budgeting for healthcare expenses should be a priority in your plan. It’s important to understand Medicare and how it can be augmented with savings vehicles like health savings accounts (HSAs), to provide the dual benefits of investing funds tax-free for long-term growth, while providing a significant savings account for healthcare expenses in retirement. HSAs may be used to pay Medicare premiums, but you can no longer contribute to an HSA while on Medicare, which is why it’s important to plan ahead. It’s also important to consider the significant expenses that may come in the later years of retirement with skilled nursing, assisted living, or in-home care. Options such as long-term care insurance or annuities with long-term care components can reduce the burden these expenses have on your savings — but remember to review these options in depth before making a decision.
Consider increasing your savings rate incrementally each year, especially if you’re still in the early stages of your career.
Start your longevity planning now
Longevity planning is an essential yet often overlooked aspect of financial planning. It’s important to embrace the journey with intention and purpose. Start by assessing your current situation and longer-term goals. Then consult your financial advisor to create a personalized plan based on your income and investments, your spending, and the impact of forecasted inflation and healthcare costs. Revisit your plan along the way and adjust as necessary. Remember, longevity planning isn’t just about numbers — it’s about creating a secure and fulfilling future. Take steps today to build a resilient financial foundation for the years ahead.
