The stock market has been extremely volatile this year, and that may have some retirees worrying about their long-term financial prospects. Granted, seniors are often advised to maintain a more conservative investment mix than they did during their younger years. But even so, an extended bout of stock market turbulence could put seniors' nest eggs at risk.
While poor stock market performance may seem like a huge risk to seniors — perhaps the greatest risk they bear — there's another more-pressing threat that could compromise their long-term financial security, according to recent research from the Center for Retirement Research at Boston College. And it's a threat that today's workers should take steps to address.
Americans are living longer
The fact that Americans are living longer these days is a good thing in theory. But from a financial standpoint, it poses a challenge.
In fact, many people routinely overlook longevity risk when planning for retirement — the concept of living longer than anticipated and therefore outliving one's savings. But it's important to account for a longer lifespan in the course of retirement planning. And that means today's workers may need to take a different approach than before.
For one thing, workers should aim to max out tax-advantaged retirement plans like 401(k)s and IRAs on a yearly basis, or get as close as possible. But more so than that, they should do their best to invest their savings aggressively for maximum growth before shifting to safer assets, like bonds, as retirement nears.
It could also pay for workers to dig deeper into annuities, which are an often-overlooked financial product because they can be complex and difficult to understand. And to be clear, they have their drawbacks. But one major benefit of owning an annuity is getting some amount of guaranteed income for life — no matter how long it lasts.
Maximizing Social Security is also important. Like annuities, Social Security is designed to pay recipients for the rest of their lives. So locking in a higher monthly benefit could be the key to attaining long-term financial stability.
Retirees need to be careful with their savings
Those who are still working can take steps to address longevity risk by saving aggressively and lining up the right income streams. Meanwhile, current retirees should be careful when tapping their nest eggs to avoid prematurely depleting those funds.
One big piece of advice that's been floating around for years is that withdrawing from a retirement plan at a 4% rate makes it likely to not outlive one's savings. But that advice makes assumptions about retirees' investments and the state of the market that may not be spot-on. It also accounts for 30 years of income from retirement savings, and due to longer lifespans, some seniors may need more.
A better bet may be to withdraw more conservatively from savings — say, at a rate of 2% or 3%. This especially applies to those who leave the workforce on the earlier side, and therefore need to spread their nest eggs out across a larger number of years.
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