This could be the biggest threat to pensioners’ financial security | Personal Finance

(Maurie Backman)

The stock market has been extremely volatile this year, which may cause some retirees to worry about their long-term financial prospects. Admittedly, seniors are often advised to maintain a more conservative investment mix than they were in their younger years. Still, a prolonged period of stock market turbulence could put seniors’ nest eggs at risk.

While poor stock market performance may seem like a huge risk to seniors — arguably the greatest risk they face — there’s another more pressing threat that could jeopardize their long-term financial security, according to recent research from the Center for Retirement Research. at Boston College. And it’s a threat that today’s workers should take action.

Americans are living longer

That Americans are living longer these days is, in theory, a good thing. But from a financial point of view, it poses a challenge.

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In fact, many people routinely overlook longevity risk when planning for retirement – the concept of living longer than expected and thus living longer than one’s savings. But it’s important to take longer life into account over the course of retirement planning. And that means today’s employees may need to take a different approach than before.

For starters, employees should aim to maximize, or get as close to, tax-advantaged retirement plans like 401(k)s and IRAs on an annual basis. But more than that, they should do their best to aggressively invest their savings for maximum growth before switching to safer assets, such as bonds, as retirement approaches.

It can also pay off for employees to delve deeper into annuities, a financial product that is often overlooked because they can be complex and difficult to understand. And to be clear, they have their drawbacks. But a big advantage of having an annuity is getting a guaranteed income for life – no matter how long it takes.

Maximizing Social Security is also important. Like annuities, Social Security is designed to pay recipients for the rest of their lives. So capturing a higher monthly benefit could be the key to achieving long-term financial stability.

Retirees should be careful with their savings

Those still in employment can take steps to address longevity risk by saving aggressively and aligning the right income streams. Meanwhile, current retirees must be careful when tapping their nest eggs to avoid depleting those funds prematurely.

One big piece of advice that has been floating around for years is that if you withdraw from a retirement plan at a 4% rate, it probably won’t outlive your savings. But that advice makes assumptions about retiree investments and the state of the market that may not be perfect. It also accounts for 30 years of retirement savings income, and due to longer life, some seniors may need more.

A better bet may be to withdraw from savings more conservatively, for example at a 2% or 3% rate. This is especially true for those who leave the workforce earlier and therefore need to spread their nest eggs over a greater number of years.

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