With increasing life expectancy, federal retirees must plan for longer retirement periods, which brings about unique financial challenges. In episode 107 of The Federal Retirement Show, Val takes a deep dive into one of the most significant challenges facing federal employees in retirement—longevity risk. He also explores what longevity risk is and breaks down long-term care risk, withdrawl rate risk, taxation risk, and why it’s important to take all of this into account in your retirement planning.
Check out additional articles and factoids about Longevity Risk —
https://www.forbes.com/sites/andrewbiggs/2024/08/12/half-of-retirees-will-run-out-of-money-thats-the-good-news/
https://www.investmentnews.com/retirement-planning/most-us-adults-fear-outliving-their-money-more-than-death/251992
https://www.kiplinger.com/retirement/social-security/how-long-savings-plus-social-security-will-last-in-every-state
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09.20.24: Audio automatically transcribed by Sonix
09.20.24: this mp3 audio file was automatically transcribed by Sonix with the best speech-to-text algorithms. This transcript may contain errors.
Speaker1:
Welcome back to the federal retirement Show. I'm your host, Val Majewski with American Benefits Exchange. I really appreciate you taking the time out of your busy schedule to join us. View our content. I highly encourage you to go back and view our previous episodes and see all the information that we've put out there for you, the federal employee, who I know is looking for the appropriate and accurate and honest information when it comes to benefits and retirement. That's the goal of this show. The federal retirement show was founded over 100 episodes ago. Uh, for you, the federal employees. So you can sort through our content, get information that we feel that you need to know, and it's driven by questions, scenarios, discussions that we've had with federal employees all across the country and in our opinions. These are the topics. These are the things that are concerning to you, and that's why we put them out there. So today we're going to be talking about. Uh, some information that's come out in the, in the news in recent articles and things that I think. You need to know when it comes to your future retirement and properly preparing because part of what we do. With federal government employees is not just show you the information that you currently have when it comes to. Your benefits and retirement situation kind of give you a status update, but also project and see how things are going to go in the future.
Speaker1:
Now, we cannot do it with absolute certainty, but we get in the ballpark. To give you an idea, if you're on the right track and I highly encourage you also, if you have not gotten a full benefits and retirement review completed by somebody who's an expert in federal benefits and retirement, please do so. You don't want to go to the finish line or get to the finish line. Find out. There are a lot of things you could have done better in preparing for retirement, and this is not something you can cram for. We've talked about this before. You can't just say, oh, I've got three years left, it's time to start planning for retirement. The more you can do this along the way, the better. We had a guest on the show. Her name was Brandi Pearson. She's one of our regional reps out of the Memphis area, and she said, whether you know it or not, as a federal employee, you are retiring or planning for retirement from day one of your employment. Take advantage of all of that time. It'll make it a lot easier to get to the finish line and you'll maximize optimize. Set yourself up a lot better if you know all of this as soon as you possibly can. So today we're going to dive into something called longevity risk and making sure you have enough money for retirement. So let's dive into today's content. So as I said we're going to talk about longevity risk.
Speaker1:
How long will your retirement savings last. Now longevity risk fairly simple question. What is it. Well this is a risk of living too long. Risk of outliving your money. Risk of not having enough money in retirement due to living too long. Where we put all of that together. Now this is the number one risk. Number one risk in our opinion, for those that are entering or in retirement. Number one risk. Now there is a lot of risks that you can have in retirement. But when you look at the number one risk, why is longevity risk the risk of living too long, not having enough money to live on? You know, combination of those things. Why is this the number one risk? Because longevity risk outside of all the other risks is a risk multiplier of all the other risks. I'm going to explain that because the longer you live, the more likely it is that you're going to encounter all of these other risks. Right. We say market risk. Well, the longer you live, if you've got some of your retirement savings and some of your your future income tied into the market, like TSP, for example, the longer you live, the more likely you are to see the market downturns, the big market fluctuations. You know, on average, there's a market correction. Say every seven years. You could check me on that. But about every seven years there's a market correction on average.
Speaker1:
The longer you live, the more likely you are to see numerous market corrections over time, unless you've set yourself up in a safe way. We've got other topics and other episodes where we've discussed safety and security in retirement. But market risk again, the longer you live, the more likely you are to see these major market fluctuations or market corrections. Sequence of returns risk. Now this has to do with also withdrawing money while you're in an investment or some sort of way that you are tied to the market. So let's say again, TSP, your money's in TSP and it's still invested in the funds. It's still invested in the market. It's still invested in things that have some risk associated associated with it, the funds that have risk associated with it. And now you have to withdraw money in retirement. Right. We talked about how long were your savings last. If you're withdrawing money to supplement income in retirement and you're still at risk in the market, but what happens when the market goes down in a year when there's a correction? We just mentioned longevity. The longer you live in retirement, the more likely you are to see a correction. Well, now you're taking money out of your retirement savings that's invested in the market that just corrected. So you've got a double whammy. You saw the market go down and you withdrew money. Now your money's not going to last as long. Not only is it just coming, are you decreasing your account because the withdrawal you took.
Speaker1:
But now you've got a double whammy because the market went down, and now you've got to go above and beyond and just try to get back to normal. So sequence of returns risk. The longer you live, the more likely this is going to affect you long term care risk. The longer you live, the more likely you're going to have to have some sort of long term care type scenario where you're going to need additional care, you're going to need additional savings that's there in order to pay for these needs, right. If you need to go into a facility or assisted care, or have somebody come take care of you at your home, the longer you live, longevity is going to have an effect on whether or not you have a long term care need. Withdrawal rate, risk, same type of thing with sequence of returns, you know? But if you're taking out, if you've got even if you've got a fixed account, right, you've got money that's in a safe type account. And unfortunately, you know, if you're in something that's super safe, the chances are the withdrawal rate that you're taking is going to be greater than that rate of return you're getting right. If it's in a checking or savings account or even some sort of fixed account, chances are your withdrawal rate is going to be higher. So your account is going to go down.
Speaker1:
Well. The longer that you live, that money can run out. It's not guaranteed to last forever. And a lot of times with next thing we're going to talk about inflation. Your withdrawal rate is going to have to go up over time. And that leads to inflation risk. The longer you live, the more likely you're going to see that your dollars for today are not going to be worth as much tomorrow. So we consistently do have inflation. We just went through some some crazy days of inflation over the past couple of years. But just understand that the longer you live, longevity is going to increase your chance of seeing inflation in your lifetime and your dollars aren't going to go as far. So again, longevity factors into that. What about taxation risk? You ask anybody today, you know, do you think taxes are going to go up or down. This is not my opinion. This is people that I've talked to when it comes to just the question about taxation, which way or which direction do you think taxes are going to go up, down or stay the same in the future, up, down or stay the same? Now, majority of people that I've talked to said taxes are going to go up. A few have said it's going to they're going to stay the same. And I have not seen anybody tell me that taxes are going to go down in the future. So just understand, the majority of people are thinking taxes are going to go up.
Speaker1:
Well, the longer you live, the more that you're going to get hit by taxes in retirement. And that's something that you have to plan for. So longevity, as I said, you know, living too long, the the prospect of outliving your money, not having enough. But the question I asked at the beginning, how long will your retirement savings last? The longer you live, the more you need that nest egg or that amount to last for. And the longer you live, the more likely you are to bring these other risks into consideration or be affected by these other risks. So how do we prepare for that? We're going to get into that today and figure out how we can prevent longevity risk. There's a couple of things that I want to highlight. Right. And these are not my words. I'm just going to paraphrase some quotes I'm going to throw in here, but there's a few articles that are out there that talk about longevity risk, and what could happen if we're not prepared from a lifetime income perspective, and making sure that our money is going to last forever and making sure we're protected against longevity risk. But Forbes, there was an article in Forbes that talked about almost half of American households will run short of money in retirement if they stop working at 65. Now, generally when I talk to federal employees a lot, want to retire at age 60, 62, in their first Social Security eligible, or that's when you get that little extra bump in your retirement paycheck.
Speaker1:
65 is a common answer as well. It's been pushed back a little bit, but not too many people that I talked to want to work past 65. So for those that may think, well, this article is a little flawed because, you know, it says for people that stop at age 65, they're going to run out of money. What if they work longer? Yes, you can work beyond that. But just say, based on their study, almost half of Americans will run short of money in retirement if they stop working at age 65. This is according to a new study released by Morningstar. Morningstar projects 45% of Americans won't be able to cover their projected retirement spending. What does that mean? Their necessary basic needs that they need on a monthly basis in order to live your general household expenses? We're not talking about also the travel, the the enjoyment of retirement. We talk about covering your basic expenses. 45% of Americans won't be able to cover their projected projected retirement spending in retirement because either they don't have enough money, or they're not going to live long enough in order to, or they're going to live too long. Sorry that they're going to run out of money. So, uh, over about half of Americans, according to the study, will run out of money before they die, uh, retiring at age 65.
Speaker1:
And even with that, they said 45% of Americans won't be able to cover their projected retirement spending. So two different things there, right? People are going to run out of money. And then even with that, some people can't even afford to retire right away. They're not going to have enough money in order to pay their bills when they do retire. Investment news 2024 annual retirement study by Allianz Life said nearly two thirds of Americans are harboring great fear of running out of money than dying, so they have. This is you've heard us say this before, that people are more afraid of running out of money in retirement than they are of death. So people would would rather die according to their priority of fears here than run out of money too soon. In retirement, nearly two thirds of Americans are having a greater fear of running out of money than of dying. So two thirds of Americans, according to this study, have a greater fear of running out of money. Running out of money. Why is that? Why are they fearful of it? Well, what are their key concerns? Again, according to the study, it's inflation. We already talked about that being a retirement risk. Social security there's a lot of uncertainty. You've seen our episode on Social Security and the 2023 Social Security Trustees report. And what they're saying in plain English could happen with the Social Security amounts in the future.
Speaker1:
And then future taxes. We just talked about, you know, tax risk or taxation risk. So I'm just kind of verifying through a couple of different articles here what we've already talked about. People are afraid of running out of money in retirement. People are fearful of the other risks as well that could lead to them running out of money in retirement. So living too long in retirement, longevity risk if you plan to. Because I want everybody I don't want you just to retire, retire for a few years and then pass away. I want you to live long in retirement and enjoy that retirement that you've been preparing for your entire working career. This is your party day. This is your celebration day. This is not something to be upset about, something to be down about, because either you don't have enough money or you're fearful of running out of money. We want to make sure that you can retire how you want, when you want, and then retire the way you want continuously for the rest of your years. Kiplinger. Now, there's an article in there as well when it talked about longevity. And I'm going to throw a different curve in this. So it's not just a living too long and making sure that you're you're preparing and you're setting yourself up, right, to never run out of money in retirement. We can talk about that and I will talk about that, but also comes down to where you retire.
Speaker1:
And they did a study. They just used a certain amount of retirement savings. So this article showed $750,000 of retirement savings plus somebody's Social Security. And how long would it last? Now, I know US federal employees are a little different. So you have a pension, Social Security and your TSP. Is that retirement savings that they were talking about. So it's slightly different, but it still shows. How far is your money going to go in the following states. And we're looking at what are the best states to retire in, meaning which ones are going to take the least amount of money to live in in retirement, and which ones are going to take the most amount of money to retire in meaning? Also, which ones are going to drain your assets quickly and which ones are going to drain your assets more slowly. So when we looked at this study, they just showed, okay, how long is your retirement going to last based on where you live now, you don't have to retire where you finish working, you can move to a different state. There are a number of different states out there, like my home state of Texas that does not have state income tax. So you're not going to get hit on state income tax when it comes to anything. Your social security, your pension, your TSB, there's no state income tax. So that's like if you're not living in Texas and you're living in a different state that has high state income.
Speaker2:
Tax.
Speaker1:
You're going to get a pay raise by moving to a state similar to this because there's no state income tax. So that has a lot to do with factoring in how much money you need to live on, right, and how long your money's going to last. Because if the state is not taking some of it well, it's going to last longer assuming the same spending in both situations. So looking at this, it said one of the hardest risks to manage is, according to this article, is longevity. Longevity. It's one of the hardest risks to manage because, well, number one, we don't know how long we're going to live for, but we don't know all those other factors that go in to living long, right? We talked about taxes, market risk, inflation, long term care scenarios. We don't know. But a recent study, uh, according to them, shows that how long retirement savings will last based on where you retire and the six I'd say top six. Uh, because I don't have all the room in the world to throw every single state in here. And you can certainly go find the article. We can link it in the description in the notes for this episode. But the top six best states where your money will last the longest are going to be West Virginia, Oklahoma, Kansas, Alabama, Mississippi and Missouri. There's a number of factors that go in there. It's going to be state income taxes, cost of living things of that nature that go into these studies to see which states are the best when it came to the worst states, meaning in their study, the money would run out as quickly as possible, right? These are the quickest states where the money will run out.
Speaker1:
Hawaii. California. District of Columbia. Washington, D.C., Massachusetts, Alaska. Which was a surprise for me. I wouldn't have thought Alaska in there and then New York. So the ones that people generally think of when I talk to federal employees, they say, where is it that you're currently living and where do you certainly not want to retire? I have not heard of a lot of folks saying they want to retire in California or New York. Based on these reasons, I wouldn't think Hawaii. I mean, you're paying for location, location, location, right? If you want to retire in Hawaii, there's a there's a number of positives to that. But unfortunately your retirement savings, all things considered equal, will run out the quickest if you retire in Hawaii. So just if you want to see the full list, you can go to the article, check that out. But that will have a factor in how long your retirement savings lasts, how much you're going to need in retirement, and making sure you do not run out of money where you live. Cost of living. Not just housing, property tax, groceries, gas, taxes for that state. There's a lot of factors that go in to those things. So how do you take longevity risk off the table? Now we've talked about this in other episodes.
Speaker1:
When it comes to TSP, unfortunately there's nothing we can really do as far as longevity with your pension and Social Security. You do have some options now. How do you increase your pension, which is a form of lifetime income? Um, how do you increase that? You try to make more money and you can work longer. All right. Those are those are two things you can control. But you really you can't control the calculation. You just can control perhaps how much you make because you can try to get as many promotions. Pay raises, step increases. It depends on where you live. Here your locality pay can be higher for your high three, but you have retirement income and you have Social Security. Now how can you affect your Social Security? Well, you can work longer to delay your Social Security and that will increase your benefit. Increase your benefit from age 62 all the way up to age 70 every year you wait. That money is going to be starting off at a higher amount. And it's a form of lifetime income, right? So you've got two of those. Now, most federal employees that we talked to are going to need their third retirement savings account, their TSB, to pick up the slack when it comes to the remainder of their retirement income. So how do we take longevity risk off the table. Well, we talked about sequence of returns risk or we talked about withdrawal rate risk.
Speaker1:
How can we do this. And this is through guaranteed lifetime Time income. You can turn that extra savings that you have into guaranteed lifetime income. Ensure you have all your basic living expenses taken care of, locked in, guaranteed with guaranteed lifetime income. So if you look at this and you've got, well, I've got my pension as a federal employee, there's a federal retiree, I've got my Social Security. I want to make sure that all of my expenses, all of the things that I need to pay for, are taken care of 100% with guaranteed lifetime income and maybe even ideally, increasing guaranteed lifetime income. What that means is your pension. It'll be subject to cost of living adjustments. Same with Social Security, so that should increase over time. If you need TSB to pick up the slack, you can set it up to where even that income increases along the way to keep up with inflation and cost of living adjustments, things like that. So that way, you know 100%, whether you live five years in retirement or 25 years in retirement? Your income is guaranteed for life. You are covering all of your basic expenses and hopefully then some with guaranteed lifetime income. It cannot stop. You cannot outlive it. It'll keep coming and coming and coming no matter how long you live. That gives you what peace of mind that gives you that sleep well at night insurance. No, not if to worry.
Speaker1:
You're not going to have that number one fear that retirees are having of saying, I'm more afraid of running out of money in retirement than dying. No, you can go enjoy your retirement because you know exactly what you're going to be making on a monthly basis, on an annual basis, because it is guaranteed. I love that word. Guaranteed lifetime income guaranteed. You cannot cannot outlive it. The happy factor. We talked about this too. I mean, when I talk to federal employees about retiring, I don't say, would you want to have a sad retirement? Do you want to have a so-so retirement? No. They want to be happy in retirement. Do you want to be happy in retirement? Well, I know how to do that. And the way to be happy in retirement is to be properly prepared and make sure you've got all of your bases covered. I'm a baseball guy. I love baseball analogies, but you want to make sure that you have all of your bases covered when it comes to your retirement income. You don't want to leave anything to chance. You don't want to leave that big portion of your retirement income subject to market volatility. We've seen what has happened before. Uh, looking back at history, you know, we tend to have a short term memory when it comes to that and forget what has happened in the past. But if you need this money now for retirement, why not look at setting it up on a guaranteed lifetime income basis so that you can have that happy factor, have that sleep well at night insurance, have that peace of mind knowing that that income is going to continue to come and can continue to come at the level that you desire because it is set up, it is guaranteed for life.
Speaker1:
According to a New York Times article, lifetime income strategy or key or stream. Lifetime income stream. Key to retirement. Happiness. This is what it says. It says securing at least a base level of lifetime income should be every retirees priority, at least if they want to live happily ever after, securing at least a base level of guaranteed, it should say, lifetime income. That means it cannot stop. It will not stop while you're alive. That's that peace of mind again. But if you want to retire happy, you want to have that happy factor. Securing at least a base level of lifetime income should be every retirees priority, at least if they want to live happily ever after. So again, as a federal employee, you have your pension, Social security, both are lifetime incomes. I'm saying that ideally because we never know what's going to happen with Social Security, I hope it never goes anywhere. I hope it never changes. But read that trustees report or go back and view our episode about that. Then when it comes to TSP or any other retirement savings you have, make sure that you're at least generating the base level of guaranteed lifetime income.
Speaker1:
Or now, in combination with your pension and Social Security, the remaining amount filled in by TSB. So you have a base level of guaranteed lifetime income to cover your expenses, your cost of living needs, all of those things so that you can retire happily ever after. So when it comes down to longevity risk, I mentioned that that's the title of this. How long will your savings last in retirement? You want to absolutely, 100% make sure that you are taking that risk off the table, because there's a lot of people that I've talked to that they're already in retirement and they're forced they're forced to kind of let it ride a little bit. Why? Because they're trying to stretch this money out. They did not prepare properly. And they're trying to stretch this money out by gambling a little bit. Right. It's like saying, hey, I've got paid today. I'm going to go to the roulette table. I'm going to put all my money on red. I'm going to try and double it because I need to. It's not going to go as far if I spend it here, I need to double it. But you're at risk of losing it, so I don't want you to have that risk in retirement. I want you to have that peace of mind that guaranteed lifetime income that you need to live on so you can take longevity risk off the table. It's not going to be something you're fearful of like others, because you know 100% that as long as you keep living, that money's going to keep coming.
Speaker1:
And that is a heck of an incentive to keep living because you know you're going to get more money. So if you set yourself up properly, we can take longevity risk off the table. And as I said, it's a risk multiplier of all those other risks, right? The longer you live, the the better chance you're going to see some kind of market correction. You're going to see inflation, you're going to see taxes change. You're going to have that sequence of returns risk eliminated because that money's coming regardless of what's going on out there in the market. And you're not at risk of of having your money run out when it comes to taxation risk. Like I said, there's there's so many risks. We can take off the table. As long as you secure at least, at least I say at least a base level of guaranteed lifetime income. So we add up your pension, Social Security, and then tsp your other retirement incomes that you've got. You should be 100%, if not more, covered for the rest of your life. Awesome stuff. Safety and security is phenomenal. Peace of mind is phenomenal that sleep well at night insurance is phenomenal. Now how do we know if you're there? How do you know if you're prepared? How do you know if you're going to have that peace of mind? You need to get the benefits of retirement review completed.
Speaker1:
This is where you go to our website, Federal Retirement Show.com you fill out the form, you reach out to us and one of our reps across the country. Again, if it's not me personally, we'll be in contact with you to do a full benefits and retirement review. We'll go over all of the ins and outs when it comes to benefits of retirement. Answer your questions. Make sure we get you all the information you're looking for, because we just want to make sure that you have that stamp of approval. Boom. And you are good to go. You got a good thumbs up when it comes to your future, and you are set up properly to avoid all of these risks that could encounter in retirement. So do yourself a favor. Go to our website, fill out that form. We'd love to be in touch with you and go over your benefits and retirement situation. I also encourage you one more time to go through our previous content view, all of our previous episodes. We've got a lot of great information for you out there, and perhaps you can get some of your questions answered just by viewing our previous episodes before you get your benefits and retirement review completed. Thank you again for taking the time out of your schedule. My name is Val Majewski with American Benefits Exchange. You've been watching the federal retirement show. Look forward to seeing you on a future episode.
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