Is your retirement plan built to last?

By Jason R. Friday, CFP®, MPAS®, RICP®, CMFC, Head of Financial Planning

For decades, retirement planning is largely about accumulation. The day you retire, everything changes: Your savings must become a source of income that can support the life you want, potentially for 30 years or more.

That takes more than reaching a target balance. A strong retirement plan brings your expected spending, dependable income, investments, taxes and key risks into one coordinated strategy. It should also be flexible enough to adjust as markets, costs and your priorities change.

The following considerations can help you evaluate whether your retirement plan is positioned to support both your lifestyle and long-term financial needs.

Longevity and life expectancy in retirement

One of the most important retirement risks to address is longevity risk, or the possibility of outliving your savings. A longer life means your money must support more years of spending while remaining exposed to other risks such as inflation, market fluctuations and rising health care costs.

Many people underestimate how long retirement may last because they focus on life expectancy figures calculated at birth. For retirement purposes, planning should focus on life expectancy at retirement age. According to the Social Security Administration, a 65-year-old man has an average remaining life expectancy of 18.1 years, to about age 83. A 65-year-old woman has an average of 20.6 remaining years, to about age 86.¹ Since these are averages, many retirees will live considerably longer.

For couples, the planning horizon may be longer still to support a surviving spouse. Rather than planning to a single average, consider your health, family history and lifestyle, and test how your plan could hold up if one or both spouses live into their 90s.

How much will my retirement lifestyle cost?

Start with what you spend today, then adjust for how retirement may change your budget. Separate essential expenses, such as housing, food, utilities, insurance and health care, from discretionary expenses, such as travel, dining and hobbies. This helps identify the costs that must be covered from those that could be adjusted if circumstances change.

Some expenses, including commuting and payroll taxes, may decline. Others, such as health care, travel or home maintenance, may rise. Inflation can also increase costs over a long retirement, so your retirement plan should account for expenses changing over time rather than relying on today's budget alone.

Coordinating your source of retirement income

Once you have estimated how long retirement may last and what your lifestyle may cost, the next step is to determine how your income sources and savings will work together.

Building a foundation of dependable income

Social Security is an important source of retirement income for many households. Benefits can be claimed as early as age 62 or delayed until age 70. For individuals born in 1960 or later, full retirement age is 67. Benefits increase for each year claiming is delayed beyond full retirement age, rising by approximately 8% annually until age 70, when the maximum benefit is reached.

For married couples, maximizing this benefit often means having the higher-earning spouse wait to claim. Because a surviving spouse inherits the larger of the two monthly benefits, delaying creates a higher, permanent income stream for whichever partner lives longer.

However, delaying is not automatically the best choice. Health, life expectancy, immediate income needs, employment and spousal or survivor benefits should all inform the decision.

Pensions can provide another source of income, although they are less common among today's workers. If you do receive a pension, evaluate your payout options carefully. Choosing between a single-life annuity, a joint-and-survivor option, or a lump-sum distribution impacts not only your monthly cash flow, but also long-term protection for your spouse and potential tax exposure.

Income annuities can be considered to help cover shortfalls between essential monthly expenses and dependable retirement income. By converting a portion of your retirement savings into an income annuity, you may be able to reduce reliance on portfolio withdrawals and help manage longevity risk.

Optimizing retirement withdrawals and taxes

Retirement and investment accounts can supplement income needs, fund larger discretionary expenses or remain invested for potential long-term growth. One strategy is to bucket assets by when you expect to use them, keeping near-term spending needs in more stable holdings while investing money intended for later years with a longer time horizon.

The order and timing of withdrawals can affect taxes, required minimum distributions, Medicare premiums and the amount left for future needs or heirs. Because the appropriate approach depends on your accounts, income and goals, withdrawal and tax decisions should be considered together and revisited over time.

Managing other retirement risks that erode savings

Beyond longevity risk, a coordinated retirement plan should consider how other factors could affect your spending and income strategy. This includes:

• Market risk: Investment declines can reduce the value of assets available to support retirement.
• Sequence-of-returns risk: Losses early in retirement can be especially damaging when withdrawals leave fewer assets to participate in a potential recovery.
• Inflation risk: Rising prices can reduce purchasing power and increase the income needed to maintain your lifestyle.
• Health care risk: Medical expenses may be higher or less predictable than anticipated.
• Long-term care risk: An extended need for assistance at home or in a care setting can create significant costs.

No single tactic addresses every risk. Maintaining an appropriate cash reserve, diversifying investments and income sources, having adequate insurance coverage and adjusting withdrawals when conditions change may help preserve flexibility.

Building a retirement plan for the long-term

Making retirement savings last is about how the parts of your plan work together, not any single account balance or withdrawal rate. Longevity sets the planning horizon, spending establishes the income need, dependable income creates a foundation, and coordinated withdrawals help address remaining income gaps.

Retirement planning is also an ongoing process. Regular reviews can help you understand how your strategy might respond to a longer life, higher inflation, unexpected expenses or different investment return scenarios.

Whether you're preparing for retirement or already retired, a Citizens Wealth Advisor can help you evaluate your options and build a plan tailored to your goals and needs.

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