How to Plan for a Retirement That Could Last 40 Years

My mother is 90 years old, and she’s the baby of her friendship group. The oldest — and oddly the fittest — member of the group is 96, and still very much going strong. My mom retired in her 50s, when she and my 60-year-old father sold the company they’d spend 30 years building and nurturing. That means she’s been retired for almost 40 years at this point, and most of her friends are in the same boat.

Remember when “three score years and ten” was accepted as being an average lifetime? We literally expected to die (of simple old age) at 70, and we tended to retire at 65. A life-span of 90 or even 100 years is now much more common, so we’ve gone from thinking of retirement as a handful of years at the end of our lives, to a whole new life stage that could easily last 30 or 40 years.

This means retirement planning has become more complex, to say the least. And we need to start thinking about it at an earlier age, because small decisions made early in life can have a huge impact over the course of a retirement that may last decades rather than years. Here are a few things to think about.

Beware the 4% Rule

While it’s only one of many potential guidelines around retirement planning, the rule of 4% has long been something we are encouraged to consider when thinking about our future.

It’s a retirement budgeting system that suggests you should be able to withdraw 4% of the balance in your retirement pot in the first year of retirement, and then withdraw the same dollar amount, adjusted for inflation, every year thereafter, for the next 30 years.

See the problem? The rule — in its most commonly expressed form at least — is designed to give you 30 years of retirement, and no more. For many people, 30 years is too much, leaving extra as inheritance for any heirs, but for the numerous nonagenarians I know right now, it would have been way too little.

With many of us retiring younger and living longer, we need to think about retirement differently. Depending on your health, family history and the time you retire, the 4% rule will need some serious adjustment to make it a practical way of thinking about your retirement budget.

Traditional Retirement Funds

Maxing out a traditional retirement fund such as a 401(k) from a young age can be very beneficial to those expecting a long retirement.

Say you were born in the year 2002 so are just getting started in your career. If you pay $5,473 in annually and your employer matches it, you could plan to retire at 55 with approximately $444,000 from your 401(k) alone. Take that down to $3,000 with an employer match, and you’re looking at around $243,000.

You can play around with the retirement calculators found here, to get a better idea of how these funds work. Just keep that potentially long retirement in mind over your entire career. Consider it every time you’re thinking about decreasing contributions, or dipping into your retirement pot. It’s rarely a good idea to do either — especially if you’re young — unless there are no other options.

Are Annuities Good or Bad?

The answer to this is yes. Annuities can be both very good and very bad, depending on the terms of the annuity and your circumstances. An annuity is often seen as a positive thing if you expect to live to an advanced age, as they can give you a guaranteed fixed income for life. However, they can involve significant fees and can be a bad deal if you do indeed die early.

Annuities can be set up to pay out to a beneficiary if you die before a specified time, but the whole process is a little complex and you definitely need to take independent advice from a reliable professional on this one.

I remember my parents doing more research on this than almost anything else in their retirement planning process. They went for a joint annuity in the end that has paid off over time, given that one of them is still going strong at 90, but annuities are not for everyone.

Carl Reid, writing in the UCLA Anderson Review, points out that annuities account for less than 10 percent of the $25 trillion in U.S. retirement assets, stressing that complexity — and the sometimes baffling range of annuity types on the market — are part of the reason. As Reid puts it:

“All those options require careful cost and benefit comparisons, and each of those types of annuities can be stuffed with add-on bells and whistles that test the analytic skills of a CFA, let alone a consumer.”

So if you’re considering an annuity, give yourself plenty of time to research it, and take advice from a qualified professional.

What About Social Security?

Most Americans agree you can’t live comfortably on social security alone, and if you’re young right now, there’s no way of knowing what the landscape for this benefit will look like in the future, with projections showing that The Social Security Trust Funds are on a path to run out of money by around 2034. That doesn’t mean it will disappear necessarily, but it does indicate there will be some restructuring and it’s fair to assume that Social Security checks will get even smaller than they currently are.

If you’re close to retirement right now, though, social security can still be a significant part of your retirement plan. It’s an almost guaranteed monthly payment that nearly all workers qualify for at some level, and like an annuity, it pays out for life.

You can sometimes influence the amount you get as social security by choosing to defer taking it, or by adjusting the way you claim as a married couple, but ultimately there are limited ways to maximize your social security payments. It is, however, worth researching what you’ll be eligible for, checking if there’s any way to increase the amount due, and factoring that into final retirement plans.

Elder Care

Staying independent well into old age is a common goal, but it’s not always possible. Considering how to protect yourself against the (often extortionate) costs of long-term care is advisable for anyone, and more important than ever given our potentially much longer lifespans.

This doesn’t necessarily mean you have to buy long-term care insurance. As with any form of insurance, there are pros and cons to it and a lot depends on your circumstances. But having a plan for your elder care — and discussing it with all involved — is vital.

As you get older you may want to:

• Be aware what your options are regarding long-term care at home or in a facility
• Discuss with family how much help they can provide, and how
• Consider retirement living options that can provide customized levels of care as you need more
• Know the Medicaid and Medicare rules around when you’ll get help and when you won’t

You may live to 90 or 100 happily in your own home, but statistically we all need a little more help as we age, and having a clear plan for how that will happen can actually give you more autonomy and independence, while allowing you to plan financially to cover any costs.

Staying as healthy as you can for as long as you can is always a good goal (and not doing so is one of the major regrets of older retirees), but planning for declining health can actually be key to extending your quality of life, even while dealing with the various health issues old age will throw at you.

Plan for Every Eventuality

Going to live abroad in your retirement and stretch your retirement dollars a whole lot further? Great, but you never know if you’ll want or need to come ‘home’, especially if you need specialized medical care or family support.

Living the happy retirement life with your spouse? That’s great too, but be realistic. My mom lost my dad in her 70s, and so far almost 17 years of her 37-years-and-counting retirement have been as a single person. Plan for what happens when one of you passes, and revisit both your finances and practical arrangements when that happens.

Think you’ve got it all worked out? Also great, but life has a habit of throwing stuff at us: market volatility, higher-than-expected inflation, health issues and injuries, extra grandchildren and new opportunities. Respond quickly to unexpected changes, if you can, and do an annual review to see if you want to actively make changes.

Always Get Professional Advice

Planning for retirement is complicated. Take advice from a specialist financial professional who is reliable, trustworthy and really takes the time to get to know you and understand your goals. That could have a huge impact on your happiness in retirement, especially if that retirement lasts 40 years or more.