How to make your money last as long as you do

How long should you plan to live?

No one can really know, of course. But the answer to that question may be the most critical factor in making a successful financial plan for retirement.

Fewer baby boomer retirees — Americans born between 1946 and 1964 — have traditional pensions than their parents' generation did, which means they will need to retire on income from Social Security and savings. At the same time, expected longevity for men and women at age 65 has jumped more than 10 percent since 2000, according to the Society of Actuaries. Men who reach age 65 can be expected to live to an average age of 86.6, and women to 88.8.

And those figures are only averages. Odds are, you could live even longer.

These lofty ages produce what experts call longevity risk, which is the danger of exhausting resources before the end of life. The risk is significant even for more affluent households, said Vickie Bajtelsmit, a Colorado State University finance professor who specializes in retirement and financial planning.

"The problem is especially large for widows over age 85," she said, because income typically falls by roughly one-third after the death of a spouse.

Online longevity calculators offer one way to push past the averages. But Steve Vernon, an actuary and research scholar at the Stanford Center on Longevity, cautions that it's best to stick to calculators that rely only on inputs shown by research to be accurate predictors.

The most conservative retirement plan assumes that you will live to 100, Vernon said, but there are trade-offs if you take that approach. "Even though I may want my money to last a long time, I also might want to spend money in the early years of retirement, while I'm healthy enough to enjoy it," he said. "It's a very personal choice."

Despite the uncertainty, experts offer several steps for mitigating longevity risk:

• Budget your expenses. Start with a careful projection of non-discretionary expenses in retirement — food, medical care, utilities and transportation. Next, consider strategies that will allow you to cover these expenses from income sources with guaranteed lifetime payment streams, such as Social Security or a pension.

• Assess your Social Security strategy. Consider ways that you could maximize your Social Security through a delayed benefit claim, said Joe Tomlinson, a financial planner and actuary based in Greenville, Maine, who has done extensive research on retirement planning. "I always recommend starting with Social Security," he said. "It's like buying an annuity but at a much better price."

Social Security benefits are calculated using a formula called the primary insurance amount, or PIA. Although you can claim benefits as young as 62, by waiting until your full retirement age (currently 66), you will receive 100 percent of PIA; every 12 months that you delay beyond that point, until age 70, tacks on an additional 8 percent. And benefits are protected from inflation by the program's annual cost-of-living adjustment.

• Keep your day job. More years of wage income can help meet living expenses as you wait to claim Social Security. But it also reduces the number of years you will need to spend drawing down your nest egg.

Tomlinson says even retirees with sizable savings face significant risk of exhausting their accounts during their lifetimes. Tomlinson calculated a hypothetical couple who had managed to amass $1 million in 401(k) and IRA accounts, and whose annual expenses for essentials would reach $70,000, faced a 47 percent chance that their retirement plan would "fail" during their lifetimes. Failure means a forced, sharp cut in living standards. Waiting until age 70 to claim Social Security brings the risk of failure down to 38 percent.

• Consider an annuity. Annuities come in many flavors, but Tomlinson and other experts who study longevity risk recommend sticking with the most basic types. A single-premium immediate annuity is a straightforward proposition: You plunk down a lump sum of cash and begin receiving payments immediately. Or, pay a much smaller premium for a deferred-income annuity, which begins payments at a future date.

Many retirement planning experts view income annuities as a sensible component to add to a retirement plan. The Obama administration tried to encourage their use in IRA and 401(k) plans by approving rules in 2015 for a new type of deferred-income annuity, which can be held in a retirement account but excludes its value from required minimum distributions.

Studies show that retirees worry they won't get their "money's worth" if they die before recouping their investment, and many are uncomfortable giving up control of savings.

"Consumers don't love that there is no liquidity," said Matt Carey, chief executive of Abaris Financial, a 3-year-old online start-up that sells income annuity products.

"They can be difficult products to get comfortable with but make so much sense as a small portion of a well-diversified retirement portfolio," he added.

Tomlinson argues that deferred-income annuities expose buyers to excessive stock market risk while waiting for the payments to begin. "All you have to do is manage your portfolio well until you reach age 80 or 85," he said. "But that is easier said than done."

Mark Miller writes for the New York Times