5 Factors That Affect How Long Your Retirement Funds Will Last

by | Aug 11, 2022 | Blog

By Adam K. Wright, CFA®, CFP®

The top concerns of retirees and pre-retirees may vary from person to person, but almost all worry about running out of money. (1) From fearing they will outlive their savings, to the rising cost of medical expenses, to worrying that investments will be outpaced by inflation, the consensus is clear: we’re all worried our funds will not last as long as we will. Most importantly, we want to know if we’ll be okay.

Retirement funds can be impacted before, during, and after retirement. Let’s take a closer look at 5 factors that may affect the longevity of your money during retirement.

Cost of Retirement

We often find that clients underestimate their life expectancy, or take large disbursements in the first few years of retirement to travel. As a result, this overspending can leave a shortage in income over the last decade or so of life. But none of us know how long we will live, so how can we better prepare?

Having diverse investments, such as real estate, annuities, or equity income, can help bridge the gap. (2) They can provide income in addition to regular retirement distributions, Social Security income, and savings. Using these strategies can help you set a retirement income floor that will be there no matter what happens to your portfolio. 

Social Security and Medicare 

You worked and paid into Social Security and Medicare your whole life, so it’s important to make the most of these during retirement. Here are some tips to keep in mind when it comes to getting the most out of your Social Security benefits:

  • Work for 35 years. Your benefit is based on the average of your 35 highest-earning years. (3)
  • Wait until full retirement age. If you claim Social Security before your full retirement age, your benefits will be permanently reduced. Additionally, waiting until age 70 to claim benefits, you will get an extra 8% each year you work past your full retirement age up until age 70. (4)
  • Apply for spousal benefits and survivor benefits. Married individuals who have earned little income may be able to receive up to 50% of their spouse’s benefits. If your spouse has passed away and was earning a higher benefit, you may be entitled to that higher benefit. (5)
  • Research your Medicare benefits. Many people don’t know that there are many services, such as cardiovascular screenings or certain vaccines, that have no copayment through Medicare. There may also be ways to keep prescription costs down by understanding which pharmacies accept your plan. (6) Many people entering retirement are surprised by unexpected healthcare costs that can shock their retirement plan. Knowing what to expect and putting a corresponding plan in place is critical to having confidence that you’ll be okay.   

Social Security is a massive benefit and plays a big role in replacing income in retirement, so it’s wise to consult with a fiduciary financial advisor before you claim your benefit to ensure it’s optimized for your financial plan.

Tax Planning 

Reducing your tax liability in retirement can be tricky. Most retirees have a few income sources to consider, with Social Security, pension, distributions from 401(k) plans, and other investment savings. If you put the right blueprint in place, you can draw income in years when you will be taxed in a lower bracket. Here are some common ways to reduce your tax liability:

  • Municipal bonds have no federal income tax, although it may affect taxes on Social Security income.
  • If you receive qualified dividends, they may be taxed at a more favorable rate than ordinary income.
  • If you have losses from the sale of securities or real estate owned, you should be able to use that to offset capital gains.
  • Postpone your required minimum distribution from your traditional IRA, or avoid it altogether by transferring those funds to an IRS-approved charity. (7)

Sequence of Returns Risk

For retirees who are mainly relying on the sale or withdrawal of investments for income, there is an uncertainty involved called the sequence of returns risk, or sequence risk. (8) This is the worry that when withdrawals need to be made, those withdrawals will have a negative impact on the overall rate of return for the investor. In other words, if a retiree has to make a withdrawal during a bear market, or a market when stock prices are generally falling, those withdrawals are more costly than withdrawals made during a bull market, when stock prices are typically rising. And of course, now that you’re in retirement, you’re no longer making contributions to offset those losses. Reviewing your portfolio with your financial advisor to talk about diversification and other tactics may be prudent as you near retirement age.

Inflation

As each generation ages, they can recall what the typical price of an everyday item used to be. As we age, we wonder, what will these items cost in retirement? Inflation is unfortunately a pretty standard economic factor. The average rate of inflation per year is nearly 4%, (9) and at the end of June, the inflation rate was a staggering 9.1%. (10)

Certain forms of retirement income, such as Social Security and some pension plans, have an annual cost-of-living adjustment (COLA) that tries to offset inflation. Other income streams, like rental income, can increase during times of inflation. However, dividend income can generate less during times of inflation and economic slowdowns. (11)

We’re Here to Help

Retirement should be a time of relaxation, adventure, or whatever type of enjoyment you find. It should not be a time to worry about whether or not you will outlive your income streams. At Wright Associates, we’ll work with you to create a financial plan personalized for your goals.  Helping you build a reliable plan that gets you from here to there is precisely what we do. Schedule a complimentary phone call today to get started.

About Adam

Adam Wright is a CERTIFIED FINANCIAL PLANNER™ at Wright Associates, helping clients plan and prepare their investments to retire on their terms. If you’re serious about planning for your retirement and investing for your future, his annual process will help you make the right money choices today. Therefore, Adam and his team will proactively manage your accounts while communicating the progress of your financial plans. He believes the retirement advice you receive should be intentional and actionable.

Adam has a Bachelor of Science in Supply Chain and Information Systems from The Pennsylvania State University and a Master of Business Administration from the University of Pittsburgh, Katz Graduate School of Business. He lives in Upper St. Clair with his wife and two children. When he’s not working, Adam enjoys the outdoors (fly fishing), reading, and taking long runs while listening to a favorite podcast. He’s also currently encouraging himself to take up golf. To learn more about Adam, connect with him on LinkedIn.

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(1) https://www.forbes.com/advisor/retirement/top-retirement-worries/

(2) https://www.investopedia.com/terms/e/equityincome.asp

(3) https://www.nerdwallet.com/article/investing/increase-social-security-benefits

(4) https://money.usnews.com/money/retirement/social-security/slideshows/ways-to-increase-your-social-security-payments?slide=8

(5) https://www.investopedia.com/articles/retirement/112116/10-social-security-secrets-could-boost-your-benefits.asp

(6) https://www.moneytalksnews.com/slideshows/things-that-are-free-with-medicare/

(7) https://www.investopedia.com/retirement/tax-strategies-your-retirement-income/

(8) https://www.investopedia.com/terms/s/sequence-risk.asp

(9) https://www.worlddata.info/america/usa/inflation-rates.php

(10) https://www.worlddata.info/america/usa/inflation-rates.php

(11) https://www.investopedia.com/articles/retirement/052616/how-inflation-eats-away-your-retirement.asp

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