Long gone are the days of defined pensions—when employers took care of all retirement income. On the flip side, we are living longer and need greater financial resources to pay for our needs and wants.
If X equals a longer lifetime and Y equals smaller retirement funds, how do you solve for Z?
Making retirement money last longer to match a longer lifespan is a very real problem for today’s retirees. Consider the following three suggestions from The Motley Fool's "3 Easy Moves to Make Your Money Last Your Lifetime." topics: expenses, investment tools and earned income.
- Expenses: Decreasing expenses and cutting unnecessary costs is an essential first step to make your nest egg last longer. More than likely, your largest expense cost is housing. See if you can pay off your mortgage long before retirement. If not, downsizing into a smaller home either before retirement or just as you retire may make sense. Unfortunately, more and more seniors still carry mortgages during retirement. Consider throwing all unexpected financial windfalls that come your way against your mortgage, or make one extra payment every year—if cash flow allows.
- Investment Tool for Income: Think about using some of your retirement investment funds to buy an immediate annuity. An immediate annuity takes the lump sum you invest up front and converts it into a stream of monthly payments. You have several options on how long those annuity payments last. Converting all of your money to an immediate annuity is generally not advisable because once the annuity is purchased, you usually can't touch the initial lump-sum investment. Hold some of your nest egg back to give you access to cash if you need it for unexpected expenses.
- Earned Income: Baby boomers who work longer are doing themselves a huge financial favor. By working past 65, you win on several levels. Continuing your earned income stream means you can save and invest more funds for the future—growing your nest egg and delaying the time that you start taking money out of it. Also, the longer you can delay retirement, up to age 70, the bigger your Social Security benefits may be.
Reference: The Motley Fool (April 10, 2016) "3 Easy Moves to Make Your Money Last Your Lifetime."