Most people spend the majority of their working years planning for their retirement. You diligently save and invest, hoping that your nest egg will grow.
When you retire, worrying about running out of money shouldn't be a concern. This is why it's extremely important that you plan for longevity in your retirement planning process by doing these four things.
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1. Know your life expectancy
If you start working when you are 22 and retire when you're 62, you will have spent 40 years of your life working. Spending your retirement doing the things you love is something that you've earned, and knowing how long you're likely to have can help make it more enjoyable.
Your life expectancy is calculated based on a number of factors like your gender and current age. But your overall health and family history should also be considered. Making sure you calculate your life expectancy now can help you plan on saving enough while you are young and have a lot of time on your side.
2. Reconsider your asset allocation strategy
You're told frequently that you should reduce your stock exposure as you age. But if there's a chance that you'll spend 20, 30, or even 40 years in retirement, making your investments too safe may mean that your money will run out too soon.
You won't use all of your retirement savings in a year or two, but potentially over decades. Instead of making your entire portfolio more conservative, you can take a portion that you plan on using over the next five to 10 years and invest that more conservatively. This way, if you experience a bear market at any point during your retirement, the money that you need immediately won't fluctuate as much. Savings that you won't be using for years will still be invested for the long term, and you will still be building wealth.
3. Create multiple income sources
Guaranteed income sources like Social Security may only replace 40% of your income, and they don't keep up very well with inflation. You can help solve this problem by creating other income streams that grow at a greater rate.
If you are 30 years old and currently have $50,000 worth of yearly expenses, then you'll need roughly $100,000 a year to sustain the same lifestyle when you are 65 if inflation runs at 2% annually. That doesn't even take into account that as you get older and make more money, your expenses will probably increase. The rate at which things inflate also varies, and it's very possible that the things you spend more money on in retirement -- like medical care -- will increase at an even faster pace..
If you invest your accounts into a mix of stocks and bonds, it should also grow faster than inflation over the long term. You can then take withdrawals from your retirement savings that will help you cover your growing expenses.
4. Consider delaying retirement
If you've been planning on retiring at a certain age and the thought of extending it doesn't sit well with you, consider this: People are living longer than they used to. In 1960, the average life expectancy was 69.7 years; now it is 79.4 years. It is estimated that in 2060, that number will be 85.6 years.
Knowing this, you can plan on spending more time working. Working in retirement can also be different for you than pre-retirement work. It may mean that you are semi-retired and work part-time instead of full-time. This may let you perform work at a slower pace and still have time to do the things you love.
You've spent the majority of your adult life working and want a great quality of life when you've stopped. The earlier you can start planning for living a long and happy life in retirement, the better. By doing this, you can help ensure that the years you spend in retirement are enjoyable instead of worrying about whether or not you'll run out of money.
