Use a 1-2 Punch to Make Sure Your Retirement Savings Will Last!There are multiple ways to make sure your retirement savings last as long as you do. One way is to use a phased approach to utilizing your savings as retirement income.Peter Tsui is the director of global research and design for S&P Dow Jones Indices. He suggests a
method for handling longevity risk — you divide retirement into two phases and fund each phase separately:
- Phase 1: The first phase lasts roughly from retirement age until age 85, which according to the Society of Actuaries, is close to the average life expectancy for someone who turns 65 years old in 2025. (Average life expectancy means that you have at least a 50% chance of living longer than 85, perhaps MUCH longer and a 50% chance of living not as long.)
- Phase 2: The second phase is from 85 through the rest of your life — however long that might be.
Funding Phase 2: To fund the
second phase of retirement, Tsui recommends that at retirement you purchase a deferred lifetime annuity with income that will begin at age 85 and last until your death.
- A deferred lifetime annuity is simply an annuity that you buy now for income that will start at a predetermined future date. Lifetime annuities pay income for as long as you live — no matter how long that will be.
- The amount of income you will want to purchase will depend on the difference between any other guaranteed lifetime income sources like Social Security and the cost of your desired lifestyle at that time. However, be sure to also factor in healthcare costs which tend to increase as you get older.
Funding Phase 1: Your remaining savings can be used for the
first phase of retirement. Since the time period for using these assets is known, it is much easier to determine how much you can withdraw each year.