A friend told me about one of her colleagues who delayed retirement until he was in his late 60s. For years he told coworkers he would spend retirement fishing on a boat. Sadly, he died days after buying his boat, which never made it in the water. After years of planning and saving an unused boat sat in his driveway.
Fear of Longevity Risk Leads to Over Saving or Retiring Late
When it comes to retirement the most common fear is longevity risk, essentially running out of money before you die. Understandably, being in your late 70s or 80s and unable to cover your expenses is a scary prospect. But in reality many retirees delay retirement or restrict their spending to the point where they die with significant assets.
Don't Miss the Window of Active Retirement
The entire point of saving for retirement is to enjoy these work free years. And many retirees are only fit enough to take advantage of the activities they enjoy for a finite number of years. When this window of opportunity closes, due to health or injury, these activities are no longer an option. An outsized fear of longevity risk can hijack retirement goals and cause retirees to miss their window of opportunity.
Finding Balance for an Enjoyable Retirement
The key is finding the right balance, which may include retiring earlier and spending more money as an active, younger retiree. It is also reasonable to expect spending to decline in older age as retirees become more sedentary. There are also strategies for mitigating longevity risk to help maximize enjoyment in retirement.
Working Part-Time in Retirement
Semi-retirement can be obtained at a much younger age if the retiree is willing to work part time. This is a perfect chance to create balance by working a few days a week and pursuing hobbies on the days off. It also reduces a lot of the work related stress that comes from full time employment. Semi-retirement also provides an off ramp to working full time, while still retaining an income stream.
Deferred Annuity
Many investors do not like annuities because of the lower returns and higher fees, but one of the better tools for mitigating longevity risk is a deferred annuity. The annuity can be purchased decades in advance and begins paying out at a certain age. For example, buying a deferred annuity at age 55 that begins monthly payments at 75. This guaranteed future income allows a retiree to spend more now, knowing they have this additional income if they live beyond age 75.
Relocate to a Lower Cost of Living
Selling a home in a high cost area and relocating to a lower cost region can add to a retirement nest egg while also lowering the annual cost of living. States to consider are those with less expensive real estate and lower or no state income tax. In addition, in the future, if you need an assisted living facility the costs can be significantly cheaper in southern states compared to larger cities farther north. Geographic flexibility is the best way to maximize the buying power of retirement dollars.
Successful retirement planning balances an active early retirement with strategies that mitigate the fear of longevity risk.
