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Prepare for Longevity

By Sandra Block, Kiplinger's Personal Finance

Follow a local newspaper long enough and you’ll probably come upon a story about a 100-year-old resident who still bowls, goes square dancing twice a week and occasionally enjoys a shot of tequila. About 97,000 Americans are centenarians – 100 or older – and a handful of those are supercentenarians – individuals who have celebrated their 110th birthday.

Maybe you’re convinced that you won’t live that long after seeing reports that average U.S. life expectancy has declined to about 76, the lowest since 1996. But those numbers were skewed by the COVID-19 epidemic and don’t reflect the likelihood that you’ll live much longer than that, says Barbara Selig, senior wealth management adviser at TIAA.

For a 65-year-old couple, there’s a 50% chance that one spouse will live to age 93 and a 25% chance that one will live to 97, according to the Society of Actuaries. And while living into your 90s beats the alternative, it increases the risk that you’ll outlive your savings. “Longevity is the biggest financial risk for retirees,” Selig says.

With that in mind, you should start planning for longevity well before you retire – in your 50s or, ideally, even before that.

It should go without saying that saving early and often is the most important component of longevity planning. In 2023, you can contribute up to $22,500 to your 401(k), 403(b) or 457 plan, plus $7,500 in catch-up contributions if you’re 50 or older, for a total of $30,000. The maximum contribution to a traditional or Roth IRA in 2023 is 6,500. Savers age 50 and older can contribute an extra $1,000 to an IRA, for a total of $7,500.

But where you save is almost as important as the amount you sock away. If you invest all of your savings in tax-deferred 401(k)s and traditional IRAs, you could find yourself with a massive “tax bomb” in retirement that could dramatically reduce the amount you will have for your own expenses, says David McClellan, a partner with Forum Financial Management in Austin, Texas.

v That’s because every dollar you save in a tax-deferred account will be taxed at your ordinary income tax rate when you take the money out. And even if you don’t need the money, you’ll eventually need to take required minimum distributions – the start date which is gradually rising to age 75 in 2033 – that can set off the tax bomb, McClellan says.

The most effective way to reduce your tax bill in retirement is to invest a significant percentage of your retirement savings in after-tax accounts. While more than 75% of large employers offer Roth 401(k) plans, only about 14% of employees invest in them, according to Fidelity Investments, one of the largest plan providers. You’ll lose the tax deduction in the year you make a contribution, but withdrawals will be tax-free as long as you’re 59 1/2 and have owned the Roth for at least five years.

Although you can’t contribute to a Roth IRA if your income exceeds annual thresholds – $153,000 for singles and $228,000 for married couples in 2023 – there are no income limits on contributions to a Roth 401(k) plan.

Editor’s Note: Sandra Block is a senior editor at Kiplinger’s Personal Finance magazine,

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