How to extend your retirement assets and control longevity risk.
Longevity risk is the chance that your retirement assets may not last the term of your retirement. It’s a fact - people are living longer. You should plan on your money lasting until age 95 – no kidding.
Haven’t saved enough but would still like to retire early? Here are two strategies to consider based on one simple concept – don’t spend your money first!
I. Earn part time income in the first few years of retirement and extend the duration of your retirement assets by 4 or more years.
Did you know that earning $15,000, $20,000 or more per year thereby avoiding spending down assets by the same amount can extend your retirement resources by up to 4 years or more depending upon how many years you work part time? Here’s how -
Anything you do to avoid spending your retirement assets at the beginning of your retirement has a very lasting and powerful impact on your net worth, due to the power of compounding. The longer assets stay invested the more time they have to grow and the longer they last. The adjacent table illustrates how deferring retirement asset withdrawals of $20,000 per year for the first 5 years in retirement will extend the duration of you assets and help control longevity risk.
Anything you do to avoid spending your retirement assets at the beginning of your retirement has a very lasting and powerful impact on your net worth, due to the power of compounding. The longer assets stay invested the more time they have to grow and the longer they last. The adjacent table illustrates how deferring retirement asset withdrawals of $20,000 per year for the first 5 years in retirement will extend the duration of you assets and help control longevity risk.
II. Take Social Security as Early as You Can!
If ever a topic had more conflicting opinions, it is this one.
The conventional view is to wait to take Social Security benefits until your normal retirement date or later than at age 62, because the monthly amount will be higher. It is true – the monthly amounts are higher. But this doesn’t mean it’s a wise financial decision. By the way, more than 60% of the people who turn 62 take the early Social Security benefit.
Here are three guidelines. One reminder – early benefits are about 25%-35% less and do not step up at your normal retirement age but are adjusted for cost of living – so you do get a raise when you take benefits early.
1. If you plan to keep working until at least your normal social security retirement date and earn more than the maximum before early benefits are reduced or entirely withheld, then do not take the benefit early. In 2009, the upper limit for earned income is $14,160. Earnings above that amount reduce your benefit by $1 for each $2 you earn. Earn $28,320 and your entire benefit for the year will be withheld. The benefit is suspended for the time your income is above this threshold amount and will be restored when or if your income declines below the threshold limit for that year.
2. By taking early benefits, you avoid spending down your own assets by keeping them fully invested - as long as your expected future rate of return is more than 5%, it is economically better to take the benefit at age 62. Otherwise wait until the normal age (although the numbers are close). The benefit for the first four years (age 62 to 66) has a substantial impact on how long your resources will last because your money stays invested longer and the compounding benefit is carried forward far into the future extending the duration of your assets which could entirely eliminate longevity than if you had waited to take benefits. Again, just be certain that you will not exceed the annual income limit set by Social Security when payments become reduced or suspended. When you factor in compounding, it is never better to wait until age 70.
3. Cash today is always worth more than cash in the future because of the risk of inflation. Remember, every year you get a raise due to the cost of living adjustment. Just keep in mind the upper limits on earned income if you take the benefit early.
Still not convinced?
See the two charts that compare the economic values of Social Security benefits when
viewed as a deposit that grows with compounding benefits and the conventional view
that only considers the nominal amount of the benefit.
The conventional view is to wait to take Social Security benefits until your normal retirement date or later than at age 62, because the monthly amount will be higher. It is true – the monthly amounts are higher. But this doesn’t mean it’s a wise financial decision. By the way, more than 60% of the people who turn 62 take the early Social Security benefit.
Here are three guidelines. One reminder – early benefits are about 25%-35% less and do not step up at your normal retirement age but are adjusted for cost of living – so you do get a raise when you take benefits early.
1. If you plan to keep working until at least your normal social security retirement date and earn more than the maximum before early benefits are reduced or entirely withheld, then do not take the benefit early. In 2009, the upper limit for earned income is $14,160. Earnings above that amount reduce your benefit by $1 for each $2 you earn. Earn $28,320 and your entire benefit for the year will be withheld. The benefit is suspended for the time your income is above this threshold amount and will be restored when or if your income declines below the threshold limit for that year.
2. By taking early benefits, you avoid spending down your own assets by keeping them fully invested - as long as your expected future rate of return is more than 5%, it is economically better to take the benefit at age 62. Otherwise wait until the normal age (although the numbers are close). The benefit for the first four years (age 62 to 66) has a substantial impact on how long your resources will last because your money stays invested longer and the compounding benefit is carried forward far into the future extending the duration of your assets which could entirely eliminate longevity than if you had waited to take benefits. Again, just be certain that you will not exceed the annual income limit set by Social Security when payments become reduced or suspended. When you factor in compounding, it is never better to wait until age 70.
3. Cash today is always worth more than cash in the future because of the risk of inflation. Remember, every year you get a raise due to the cost of living adjustment. Just keep in mind the upper limits on earned income if you take the benefit early.
Still not convinced?
See the two charts that compare the economic values of Social Security benefits when
viewed as a deposit that grows with compounding benefits and the conventional view
that only considers the nominal amount of the benefit.
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