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By Elizabeth O'Brien
January 23, 2018

It’s the big question at the heart of all retirement planning: how long will you live, and by extension, how long should your money last?

But you don’t need to tie yourself up in existential—or actuarial—knots trying to answer the unanswerable, financial advisors say. You just need to plan to live for a really long time. “We don’t run any of our financial plans to less than age 95 for expected date of death,” says Ed Vargo, a certified financial planner in Westlake, Ohio. “For our youngest clients, it’s 100.”

About a quarter of today’s 65-year-olds will live past age 90, and one out of 10 will live past age 95, according to the Social Security Administration. The stakes are high if you think you could never be one of them: You could run out of money at a stage of life when you can’t go back to work and make more.

Failing to appreciate your potential for longevity causes a cascade of related missteps, planners say. Below are three to watch out for.

Claiming Social Security Too Early

A third of people who began receiving Social Security in 2016 started at age 62, the earliest age you can claim retirement benefits, according to the Social Security Administration. For most people, that’s just too soon, experts caution. That’s because the longer you wait until age 70, the more you receive in monthly benefits.

“The longer people can delay, they get a longevity-protected, inflation-protected annuity that grows at 6.5% to 8.3% from age 62 to 70,” says Bruce Wolfe, executive director of the BlackRock Retirement Institute. “As an example, for individuals born between 1943 & 1954, the monthly check they would receive at 70 would be 76% larger than the check they would get at 62.”

Some people do a break-even analysis, calculating the age at which the amount you receive from Social Security is the same, whether you had started taking benefits at an earlier age or a later age. Under this analysis, you generally come out ahead if you die before reaching the break‐even age and you started collecting benefits at the earlier age. Conversely, you also come out ahead if you live beyond your break‐even age and started benefits at the later age.

Jean Setzfand, senior vice president with AARP, discourages this approach. She says people should focus not on their total lifetime benefit but on their monthly income, since that affects your standard of living more than an aggregate amount stretched out over decades.

To be sure, not everyone should delay taking Social Security. Those in very poor health, for example, may have reason to believe they won’t live long and should consider claiming at their earliest opportunity.

Discounting Inflation

Remember how much a pack of gum, or a gallon of gas, cost when you were a child, and how much they cost now by comparison? That’s inflation at work. You’d need $2.14 in December 2017 to buy what you could buy for $1 in 1987, according to the Bureau of Labor Statistics’ inflation calculator.

We’ve experienced a stretch of very low inflation in recent years, so retirees may get lulled into thinking it will stay low forever. But even if inflation remains manageable in the future, the purchasing power of your portfolio will shrink over time. And inflation could ramp up, especially with interest rates rising off their lows.

Those who discount inflation may be too conservative in their asset allocation. Most investors need a healthy allocation of stocks to power their portfolio’s growth. (One exception might be the very wealthy, who can afford to remain only in bonds.)

An old rule of thumb holds that, to get the percentage of your portfolio that should be in stocks, you subtract your age from 100. That still works, as long as the resulting number is considered the floor, Setzfand says. In other words, if you’re 70 years old, you should have a minimum of 30% of your portfolio in stocks, she says.

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Failing to Plan for Medical and Long-Term Care Costs

The cost of medical care rises higher than general inflation, at a rate of about 5% or 6% a year. A 65-year-old couple retiring in 2017 will need an average of $275,000 (in today’s dollars) to cover their medical expenses in retirement, according to Fidelity. This includes Medicare premiums and out-of-pocket costs, and the cost of certain items not covered by Medicare, such as hearing aids and dental work.

Fidelity’s projections assume average life expectancy for the couple and, notably, exclude the cost of long-term care. For the most part, Medicare does not pay for the type of care that most older adults need—that is, help with bathing, dressing and other activities of daily living. The median price of a semi-private room in a nursing home is $7,148 a month, and the median price of a home health aide is $4,099 a month, according to the 2017 Genworth Cost of Care Survey.

These are daunting numbers, to be sure. But they become less daunting if you plan for them. Ashley Foster, a certified financial planner at Gross & Foster Financial Services in Houston, recently had a couple engage his services in their early 50s. The couple had been diligent savers but hadn’t considered planning for their own long-term care needs until they began helping their aging parents. They bought a hybrid long-term care and life insurance policy that would provide funds for future long-term care, and, if that wasn’t needed, a small death benefit for their heirs.

Most retirees never allocate specific dollars to cover health and long-term care expenses in retirement, Foster says. Those who do mitigate a significant risk to their portfolios.

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