August 07, 2024

How to Stretch Your Money Until You’re 100

22 minutes

Breaking down the 4 steps of the “live to 100” strategy as life expectancy increases and conventional retirement wisdom struggles to keep up.

Average life expectancy in the United States rises with each generation, and with that trend comes a lengthening of years lived after average retirement. As age 100 becomes more realistic for many people, how can you make sure your finances are set up in a way that takes care of you through your entire lifetime? This discussion was sparked by our recent podcast episode with Steve Sanduski, where we explored how financial planning needs to adapt as people routinely live healthy lives into their 100s.

The Retirement Spending Smile

One intriguing concept is the “retirement spending smile.” This theory suggests that you tend to spend more at the beginning of retirement, less in the middle, and potentially more again later on due to increased healthcare costs. If you stay healthy until 100, your expenses might not follow the traditional downward trajectory and could spike due to medical needs.

The AARP Article and Longevity

Shortly after our discussion with Steve, I came across an article in the AARP magazine about making your money last until age 100. It got me thinking: if you live to 100, it’s crucial to ensure your money does too. With advancements in healthcare, it’s becoming more likely that many of us will reach this milestone. Therefore, it’s essential to approach both your expenses and income with this long-term perspective.

Managing Your Expenses

Let’s start with managing your expenses if you anticipate a long life. Knowing your biggest costs in retirement is key. From my research, housing, taxes, and healthcare are typically your top three expenses.

Housing:

According to the Bureau of Labor Statistics, housing costs can be about 35% of your overall expenses, including utilities and maintenance. However, if we strip out the additional costs, the core expense of shelter itself averages around 20%.

Consider paying off your mortgage before retirement or downsizing to reduce these costs. But be cautious with downsizing, as it often leads to additional expenses for new furniture and adjustments to your new home.

Taxes:

Surprisingly, taxes are often overlooked in retirement cost analyses. On average, they constitute about 7% of your expenses. One way to manage this is by diversifying your tax status across various accounts (traditional, savings, Roth, and brokerage accounts). This strategy gives you flexibility to adapt to changing tax laws over the decades.

Healthcare:

Healthcare costs increase as you age, making it essential to plan ahead. When you turn 65, deciding between a Medicare supplement plan and a Medicare Advantage plan is crucial. While the supplement plan might be more expensive upfront, it could save you significant out-of-pocket costs in the long run.

Additionally, consider long-term care insurance to protect against the high costs of assisted living or nursing care, which can be financially devastating if unplanned.

Maximizing Your Income

Now, let’s talk about your income strategy to make it last until 100.

Social Security:

When making decisions about Social Security, remember its full title: Social Security Old-Age, Survivors, and Disability Insurance. This program is designed to provide support in old age, for survivors, and in case of disability.

Delaying Social Security benefits can maximize your lifetime income. Although filing early gives you more money now, waiting could result in higher monthly benefits later, which is crucial for long-term financial stability.

Part-Time Work:

Consider working part-time in retirement. For instance, would you prefer working full-time from age 60 to 65, or half-time from 62 to 70? Theoretically, the financial outcomes might be similar, but the extended work period can provide a more stable income stream and help stretch your savings.

Annuities:

Explore different income sources like annuities. These can convert your savings into a steady income stream, similar to a pension, providing financial security and often making retirees feel more comfortable spending their money. An article by David Blanchett suggests that having an annuity might give you a “license to spend,” enhancing your retirement enjoyment.

Conclusion

If you plan to live to 100, you’ll need to manage both your expenses and income proactively. On the expense side, focus on reducing housing costs, diversifying your tax status, and planning for healthcare expenses. On the income side, consider delaying Social Security, working part-time, and exploring annuities for a reliable income stream.

By taking these steps, you can ensure that your money lasts as long as you do, providing a secure and fulfilling retirement. Remember, it’s not just about surviving until 100 but thriving with financial peace of mind.

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Additional Links:

Retirement Revealed Episode 200 with Steve Sanduski

“How to Make Your Money Last to Age 100”, AARP Magazine

“Guaranteed Income: A License to Spend”, David Blanchett & Michael Finke

U.S. Bureau of Labor and Statistics: https://www.bls.gov/cex/tables/cross-tab/mean/reference-person-age-by-income-65-or-older-2021-2022.pdf

LongevityIllustrator.org

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