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We are living longer, but the life expectancy of our money may have trouble keeping pace.
The combination of longer retirements and more exaggerated cycles in financial markets heightens what financial advisers call longevity risk, the possibility of running out of money before running out of time. But adjustments can be made to investment portfolios, financial plans and lifestyles — before and after retirement — to limit the risk, they say, without increasing other risks.
''People are living longer and looking with a more critical eye at their retirement and whether they'll have enough funds,'' said
One investment vehicle, an income annuity — which in exchange for an initial lump sum typically pays a fixed monthly amount, no matter how long the holder lives — is good to counter longevity risk. But opinion toward such annuities is mixed. Some advisers, including
''The returns are not attractive because part of what you get is a return of capital'' from your upfront payment, ''not just interest, and if you die early you lose out,'' he said. ''If you want to bet that you're going to live longer than your life expectancy, O.K., but I still wouldn't do it.''
''You get a bigger bang for the buck because payments are partly a return of capital and because some people leave money on the table'' by dying early, he said. ''If you die early, you made a bad deal,'' he acknowledged. ''But you're dead, so you don't care. Annuities are a powerful tool for managing cash flow.''
Consumers needn't wait until retirement to pick up that tool. Anyone contemplating an annuity should consider buying it early, advisers say. The sooner an investor puts up the lump sum, the cheaper a certain fixed payment later will be.
A 55-year-old man buying an annuity would need to put down only
It may be possible for the 55-year-old to come out ahead by keeping his
''There is a great reluctance for most investors to purchase an immediate annuity,'' he said. ''The relatively small investment required at, say, 55 seems to offer a significant benefit so it is a more palatable purchase.''
He cautioned that this is not a good time to buy any annuity because interest rates, one of the main factors used to determine the amount of the lifelong payments, are very low.
Whether advisers like or dislike annuities, they agree that being able to rely on annuity income allows working and retired people to take more risks with their other assets, say, by owning more stocks to try to capture growth and not just income. That used to be discouraged for retirees in case the market plunged just when they needed their money.
''If you have a longtime horizon, more than 15 to 20 years, you should be exposed to the stock market,'' said
The same goes for the annuity that nearly every retiring American qualifies for:
''For healthier people, it definitely makes sense to wait until 70 to claim your benefits,'' she said.
''There's tremendous value to deferring until 70,'' he said. ''
Deferring benefits is such a good deal, he added, that retirees generally come out ahead if they make ends meet by spending more of their 401(k) assets instead of claiming
Another option is to keep working, full or part time, past your expected retirement date. That greatly reduces longevity risk in two ways, advisers say. It covers at least part of living expenses for those years, and it allows returns to continue to accrue in your nest egg.
''The impact of extending your income and deferring the need to go into your assets for several years is extraordinary,''
Staying on the job longer has another benefit, he suggested.
By working past retirement age, ''people also tend to feel more fulfilled,'' he said. ''We're living longer, better and healthier, and we're going to continue to be more active. It's not about how long you live, but how well you live long.''
DRAWING (DRAWING BY
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