The Society of Actuaries (SOA) says it expects a 65-year-old man to live another 21.6 years – about two years longer than their previous guestimate from 15 years ago – and a 65-year-old woman will live another 23.8 years, which is about 2½ years longer than previously thought.
This news applies more pressure on advisors to devise an investment strategy that can generate sufficient income for their clients’ potentially long retirement. A longer life could also cause a delay in claiming advantageous benefits for some clients.
ERISA attorney Marcia Wagner of the Wagner Law Group, Boston, says increased life expectancy raises financial risks for clients and requires careful planning.
The good news is increased life expectancy signals an expected increase in the cost of pension annuity payments, Wagner says in her newsletter, citing SOA’s forecast that retirement liabilities will rise from 4 percent to 8 percent.
“Financial advisors should be having frank discussions with their clients regarding ‘longevity risk’ and the resulting need to save even more, spend less, invest wisely and potentially work longer — not just for the increased benefits under defined benefit pension plans, but to stave off spending retirement savings,” she says.
How can financial advisors help clients when it comes to paying the price of living longer?
Tell your clients to keep working, but play sooner. The reality is that retirement has evolved. Stuart Ritter, a senior financial planner at T. Rowe Price, believes that you can begin enjoying the lifestyle you see for yourself in retirement in your early 60s, as long as you remain employed well into your late 60s. Ritter highlights a number of advantages that come from staying at your job longer. “By carving out time to travel or indulge in a hobby, while you are still working,” he says, “you will be able to profit financially from additional years of salary and benefits, while you capitalize on the opportunities during this active phase of your life. Cut back on your contributions to your retirement and use some of that money to begin exploring your options. Just be sure to keep contributing enough to your employer-sponsored retirement plan to receive any company match.”
Delay taking contributions. If your clients plan to work beyond age 70½, they can delay taking required minimum distributions (RMDs) from the retirement account they have with their current employer (certain restrictions apply). The IRS rules state you must begin taking RMDs by either 1.) April 1 of the year, once you reach age 70½ or 2.) April 1 of the year, after the year you retire from the company. RMDs from all other prior employer retirement accounts and all traditional IRAs (RMDs are not required from Roth IRAs) must begin by April 1 of the year after the year you turn age 70½ regardless of your employment status.
Wait to take Social Security benefits. By waiting until age 70, benefit payments will be almost twice what they would be if your clients started them at age 62.
Wagner also urges advisors to stay abreast of pension plan rule changes that can impact the fortunes of retiring clients.
“From funding to tax-qualification requirements, to fiduciary responsibility and liability, the pension landscape is changing and clients rely on their financial advisors for real-time and real-value assistance in these areas,” she says.
Summit Brokerage Services is a member of Cetera Financial Group, RCS Capital Corporation’s (NYSE: RCAP) retail investment advice platform.
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