Most of the retirement plans currently operational have a significant flaw. There grossly underestimated the stunning increase in life expectancy. But government and military pensions are in greater financial jeopardy because their pensioners are living exceedingly longer than the plan actuaries calculated. Watch the interview entitled Income and Expense Planning part 3 in the series Retiring Right with author, speaker, and financial consultant Alex Joyce, and talk show host, syndicated financial columnist, and popular platform speaker, Steve Savant.
Most retirement plans have not incorporated the longevity risk. Mortality risk is a risk multiplier that acerbates other retirement risks. Without mitigating mortality risk, many middle-class retirees could exhaust their 401(k)s and be left with Social Security and a little equity in their homes. The possibility is based on the sequence of returns, the math principle of withdrawing from your retirement plan in down markets. The sequence of returns during that period of the Great Recession left some retirees reeling with cash shortages and a future some are still recovering from.
Living longer may affect the quality of life because medical bills and long-term care costs will absorb discretionary dollars. 70% of seniors today use some long-term care assistance. Living longer will only compound the problem and the expense. If the baby boomer generation gets tight with their money, it could cause a rippling effect on the economy as spending grinds to a halt.
Inflation is a real and ever-present danger to seniors. It doesn’t matter what the declared rate of the CPI is or any other inflation indicator, if it doesn’t include the commodities of life; it’s a worthless gauge. The purchasing power of your retirement dollar is a risk and the longer you live the risk becomes greater. It is estimated that over the last 50 years the purchasing power of the dollar has eroded 85%. It could be a mini-depression for those living past average mortality expectations just to pay the bills. Even Social Security can’t be relied upon to generate a cost of living adjustment (COLA). Over the last seven years, Social Security has credited little to nothing in COLA for Social Security recipients.
Only guaranteed lifetime annuities can generate life-long income and can be purchased with a COLA to meet increasing costs of living during retirement. Without guaranteed lifetime income and an inflation rider, you’re subject to running out of money with no increase to meet the demand of the increasing costs of basic goods and services. Now is the time to purchase a block of income for your portfolio.