In our last post for The Fiduciary Advisor, we went into detail on investment risk. Another major retirement risk that has increased for many individuals is longevity risk. Simply put, longevity risk is the risk that payout levels are higher than expected due to increasing life expectancy trends. Knowing how much longevity risk you are taking on and how to best mitigate it is a crucial component of fiduciary financial planning.
Social Security & Medicare math
Let's take a look at two retirement plan components people commonly use to supplement their retirement fund — Social Security and Medicare — and general levels of longevity risk. People are living a lot longer and Baby Boomers are retiring at record rates. Roughly 10,000 Baby Boomers turn 65 every day, and they currently account for 26% of the total U.S. population, according to Pew Research. By 2030 all members of the Baby Boom generation will be at least 65. Have you done the math on the longevity implications for your retirement plan?
Review depletion dates vs. your plan
If Social Security is part of your retirement plan, there are some major questions as to its longevity. Highlights from the 2013 Annual Report are worth reviewing against your retirement plan. Starting in 2033, the Social Security trust fund is projected to be fully depleted, and it is estimated that the government will be able to pay only 77% of the scheduled benefits with the tax revenues it collects. Not bankrupt, but troubled.
Medicare also has major problems. The projected depletion date for the Medicare trust is 2026 — when the board of trustees estimates that Medicare tax revenue and premium income would be sufficient to pay only 87% of the estimated costs. This percentage is estimated to decline beyond 2026.
Fiduciary financial planning takeaway
What's the longevity risk takeaway for your retirement plan? Count on paying higher Social Security and Medicare taxes, higher Medicare premiums, and receiving reduced benefits — and decide how you will make up for any shortfall. It's critical to understand longevity risk and fully account for the implications in the broader context of your retirement and financial planning. If you haven't, it's never too late to start. View our Fiduciary Financial Planning webinar to learn more or contact us to discuss ways to get started.
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