The idea of humans living to be 100 years old used to be the stuff of fairy tales and science fiction. While it is not yet a common reality, advances in healthcare make it increasingly possible. But fairy tales never considered the financial cost of living so long; After all, the rent must be paid and the landlord will not accept the dragon gold.
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Understanding that their need for steady income won’t change (even if the candles on their birthday cake reach triple digits), many people are turning to what’s known as the 100-year life plan.
Although a 100-year life plan focuses on improving all areas of aging, including health and interpersonal relationships, financial well-being plays a central role. It is essential to create a longevity portfolio that provides financial resilience and flexibility. For some financial experts, this longevity portfolio is incomplete without guaranteed sources of income.
GOBankingRates doesn’t have a recipe for an elixir that will help you live to 100, but we do have access to a financial expert who can explain why you should consider guaranteed income as part of your 100-year life plan.
Longevity risk is exactly what it sounds like: the worry that your savings will survive into retirement. Chad D. Cummings, Esq., CPA, CEO of Cummings & Cummings Law, sees this concern growing among the clients he serves in Florida and Texas. He regularly advises clients who are still withdrawing funds from retirement accounts well into their 90s.
“Longevity risk is now a statistical certainty for many clients in Florida and Texas, not a planning outlier,” he said. “Most financial planners are well behind the curve on this: A 65-year-old today has a one in three chance of living past 90 and a one in seven chance of living past 95.”
Cummings shared that without guaranteed sources of income, portfolios face a significant longevity burden, or the gradual depletion of assets as withdrawals continue over a longer life span.
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As Cummings sees it, older adults are vulnerable to certain factors outside their control, such as poor market timing or declining cognitive abilities.
Certain types of annuities, such as single premium immediate annuities (SPIA) and deferred income annuities (DIA), can provide stable income immediately or later in life. They help protect you from negative factors by providing you with guaranteed monthly income that does not depend on market performance.
“These vehicles convert assets into irrevocable income streams insulated from market volatility,” Cummings said. “This is particularly critical as elder financial abuse accelerates, especially in Texas where POA fraud is rampant. Clients over age 70 without trusted family members should consider annuitizing to reduce discretion-based vulnerabilities.”
In other words, establishing one of these reliable sources of income can protect seniors from having their money misused by someone they should be able to trust.
You’re probably aware of the financial convenience of spreading your investments across different types of assets, but Cummings also wants you to consider the tax treatment of your income.
If you lean too heavily on traditional (or pre-tax) IRAs, you may experience sudden increases in your income in the future, which could lead to higher Medicare premiums and taxes on your Social Security benefits. Cummings’ solution? Mix things up, but include guaranteed income in that mix.
“We often recommend a tiered mix of single-premium immediate annuity income, rental income, qualified dividends, and tax-free municipal bond interest to smooth adjusted gross income and reduce IRS audit flags,” he said.
Basically, this approach keeps your income more consistent and helps you avoid complications or unnecessary tax spikes that could draw the attention of the IRS.
For Cummings, fixed income that does not increase with inflation is not enough to help seniors keep up with the rising costs of living.
“A fixed monthly payment of $3,000 loses more than 50% of its purchasing power in 25 years with 3% inflation,” he said.
People who expect to live past age 85—a rapidly expanding demographic—need income that adjusts with inflation, such as annuities with cost-of-living adjustments or investments in Treasury inflation-protected securities (TIPS).
Living to be 100 or older sounds exciting, but it comes with challenges, especially when it comes to financial security. Integrating guaranteed sources of income into your 100-year life plan can help protect you from market volatility and people who may take advantage of your trust.
You’ll want a strategy that avoids unexpected tax bills while ensuring your income keeps up with inflation.
Even if you never reach age 100, taking a financial approach that can support your independence for decades is always a smart move.
This article is for informational purposes only and does not constitute financial advice. Investing involves risks, including possible loss of principal. Always consider your individual circumstances and consult a qualified financial advisor before making investment decisions.
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This article originally appeared on GOBankingRates.com: Why Guaranteed Income Should Be Part of Your 100-Year Life Plan
