The biggest risk retirees face is outliving their assets – spending too much or saving too little for their golden years, which are potentially a lot longer than many might expect.
According to a new report from Wells Fargo Investment Institute, citing government data, the average life expectancy for a 65-year-old man today is 84.3 years and for a 65-year-old woman 86.6 years, and those numbers are expected to grow. By 2030, nearly one in five U.S. residents is expected to be 65 or older, according to the report Living Longer, Living Better.
Given this "longevity risk," coupled with the declining ratio of workers to retirees to fund Social Security and Medicare and declining market growth rates, "it's imperative to develop an appropriate and realistic plan" for a "potentially longer lifespan," according to the report. Here are some of its key recommendations for advisors and their clients to develop instead a "longevity dividend":
1. Be prepared to fund two to three decades of retirement or more
"Whatever your current age or financial situation, we believe it's imperative to develop an appropriate and realistic plan for your potentially longer lifespan," the report states. "You have to fund 20, 30, 40 years of retirement if you retire at the traditional 62 to 65," says Tracie McMillion, head of Global Asset Allocation Strategy for the Wells Fargo Investment Institute.
According to government statistics, the average life expectancy is now four years longer than it was in 1990 – increasing on average one year for every four. If that pattern continues, 26 years from now the average life expectancy for men will be over 88 years and for women over 90. Food for thought for those now in their early 40s.
2. Consider the impact of rising health care costs.
While longevity is increasing, health care costs are rising. That, coupled with "diminishing defined-benefit pension plans and the uncertain future of Social Security all pose challenges and risks for retirees," the report states.
Health care spending in the U.S. for those 65 to 84 is close to $16,000 per person – almost double the spending for those 45 to 64 years of age, according to the report, which cites 2014 data from the Health Affairs policy journal. For those 85 years or older, it doubles again to almost $35,000.
3. Don't count on Social Security as it is now. Payments could decline
For most people, income from Social Security will be "insufficient, so they have to fill that gap," says McMillion, and Social Security payments could potentially decline as a result of funding issues.
By 2030 — just 14 years from now — nearly one in five U.S. residents is expected to be 65 or older, according to the Wells Fargo report. At the same time, the ratio of workers to retirees funding Social Security is expected to be roughly 2 to 1, down from nearly 3 to 1, according to the Social Security Administration.
"This population mismatch is likely to result in policies that place a greater burden on current workers and reduce benefits for retired workers," according to the Wells Fargo report. "Government programs designed to assist retirees have grown disproportionately large and threaten to crowd out most other expenses by 2040 if reform is not enacted."
