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Financially Planning for Longer Lifespans

In 1970, the life expectancy for a U.S. resident was 70.81 years. By 2016, that number increased by nearly eight years, to 78.69 years. Meanwhile, “full retirement age,” as defined by the Social Security Administration, has crept up from age 65 (for those born in 1937 or earlier) to 67 (for those born in 1960 and later). As people continue to live longer, yet retire around the same age, it becomes increasingly important to shore up and stretch retirement savings longer. Here are some ways to help you with your longevity planning.

Take advantage of catch-up contributions

The key to building a long-lasting nest egg? Save as much as you can.

Starting early with your retirement savings is always a good idea. However, many young people have trouble putting away a significant percentage of their salaries while starting their careers. Servicing student loan dent, buying a home and starting a family understandably take priority. If you find yourself nearing retirement age, worrying that you haven’t saved enough, take advantage of catch-up contributions.

Catch-up contributions allow people age 50 or older to make additional contributions to their 401(k) or IRAs. For 2019, the standard contribution limits are $19,000 for 401(k)s and $6,000 for IRAs. Catch-up contributions allow individuals to contribute an additional $6,000 to a 401(k) (for a total salary deferral of $25,000 per year), and an additional $1,000 to an IRA (for a total of $7,000 per year).

Create tax-free retirement income

When you save for retirement, consider contributing to Roth accounts that will provide a tax-free stream of income in retirement. Contributions to traditional IRA and 401(k) accounts consist of pre-tax dollars. This means you get tax benefits in the year the contribution is made, but distributions are taxable in retirement. And early distributions incur a significant penalty on top of the taxes owed. With a Roth IRA or 401(k), you make contributions with after-tax dollars. You don’t get a tax break now, but retirement distributions come out tax-free.

Keep in mind, if your income is too high, Roth IRA contribution limits kick in. However, there are no income limits on Roth 401(k) contributions. Without Uncle Sam taking a cut of your retirement income, your nest egg can grow more and stretch longer in retirement.

Delay Social Security benefits

No matter what year you were born, you can start receiving Social Security benefits as early as age 62. In fact, about one-third of retirees start claiming benefits at that age. But that decision could end up costing them big throughout a long retirement. That’s because if you retire early your benefits are reduced by a fraction of a percent for each month before your full retirement age. For individuals born in 1960 and later, starting retirement at age 62 means your retirement benefits will be reduced by a full 30%.

To illustrate, say you were born on the first day of 1960, are considering claiming Social Security when you reach age 62, and your monthly Social Security benefit at full retirement age (66) is projected to be $2,043, or $24,516 per year.

If you start claiming Social Security at age 62, your monthly benefit would be $1,447, or $17,364 per year. By retiring early, you lose out on $7,152 per year in benefits.

On the other hand, if you delay retirement until age 70, you’ll receive $2,561 per month or $30,732 per year. The more income you get from Social Security, the less you’ll need to withdraw from your retirement portfolio.

Wondering what that will mean for your retirement? Run the numbers using AARP’s Social Security Benefits Calculator.

The bottom line

Thanks to breakthroughs in medical technology and healthier lifestyles, Americans can expect to live longer in retirement and enjoy a better quality of life. But it also means their retirement assets may need to last for decades.

If you’re falling behind on savings, but you’re still working, take advantage of catch-up contributions and Roth accounts to stash away as much tax-free retirement income as you can and consider working longer rather than retiring the moment you reach age 62. Every dollar you save can help you approach and enter retirement with greater confidence that your nest egg will last.


Accounting Principals

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