Running out of money is the greatest retirement fear. Advice from Morningstar’s Christine Benz and Wells Fargo’s Fredrik Axsater on how to avoid it. WEALTHTRACK #1533 broadcast on February 01, 2019.
Running Out of Money Is the Greatest Retirement Fear. How to Avoid It With Two Retirement Experts
Our discussion it is a realistic fear. And as you're saying about 70 percent of people are saying that this is our greatest fear of running out of money in retirement. From a financial standpoint to an end and 38 percent said that if they live past 85 it would represent financial hardship. Right so those are really those what if scenarios that I was referring to that are so important for us to try to address.
Christine you know you're advising actually individual clients so. I mean is living beyond 85. A very real concern and should it be.
Well it absolutely should be. Longevity has stalled a little bit in the U.S. in terms of increases in longevity. But if you're part of a married couple there are roughly one in three odds that one of you will live to age 95. So if you're embarking on retirement it's sort of the traditional 65 years old that's a 30 year time horizon that you need to to plan for and you need your portfolio to remain sustainable over that time horizon. So let's talk about some of the solutions to this.
Let's say that that year you're lucky enough and also have planned well enough that you're OK into wait. So what do you do. Frederick if you live beyond 85.
Well one of the things that are coming up in this research is longevity insurance. Right. And so we're talking about the key risks that we face in retirement from a financial standpoint. You can think of that as sequencing risk. There is market risk. There's inflation of risk. Longevity risk is the most important risk. So if you can buy insurance so that you get a monthly paycheck if you live past 85 we are addressing the most important issue and Christine so what are you recommending for as far as longevity insurance.
For instance what are the solutions that you are recommending to your Morningstar readers and audience.
Well you know it's not a terribly liquid market yet. I think financial planners and advisers have a lot of interest in this area and we are starting to see new products come online. The good news is that because say you buy a typical longevity insurance product it doesn't start paying out until later in your life. So it's pretty affordable. That's the nice thing so the early so shouldn't you do it early and are the words sixty five I think right. When you are ready to be serious about embarking on retirement. I think it's a reasonable time to look at a product like this and of course you want to evaluate the insurers wherewithal because you might have another 20 years before you begin receiving income from the product.
So you want to make sure the insurer is viable and how much is enough what you pay or how much do you pay for what kind of coverage.
Yeah. So in our research we find that if you put it away about a seventh of your of your savings at 65 which I think is a great age. Christine moonstones then you should expect when you reach 85 to get roughly 30 percent yield on that money. And that's even today with interest rates still pretty low rates and so forth so it to a point it becomes very price competitive very attractive just because the first payment is later on as Brunious as more of it. It's insurance it's right for us. It is something that hopefully is a very good thing. Write us living longer.
The objections to that that people have from an investment view as will water if I don't live beyond 85 and then I'm going to lose that investment or it's money that I could be investing now for the next 15 years or 20 years. You know how do you overcome that objection.
Academic research certainly points to there being sort of a visceral negative reaction to permanently parting with money and maybe never getting in use from it. I guess the counterargument is we all pay homeowner's insurance and don't necessarily need it. Hope we'll never need it. I think it's helpful to adopt a similar mindset in relation to protecting against longevity.
What are some other solutions.
Christine 2 if if you if you are lucky enough to reach 85 and live live beyond 85 Well one of the obvious ones is if you are taking Social Security if you can delay your benefit even a couple of years or all the way up until age 70 you can enlarge your benefit quite significantly so that is a great thing to consider because that's a lifetime benefit of course and it's also valuable for spouses where maybe you have one younger spouse one older spouse. If the higher earning spouse can maximize his or her benefit by delaying a little bit that can be really powerful in terms of hedging against longevity. Another idea is just to make sure that the portfolio the investment portfolio has adequate growth potential. Because if you're hunkered down into safe securities.