The average U.S. lifespan is 80 to 85 years, but many people today live well into their 90s. To quantify this, the Internal Revenue Service (IRS) has been forced to update its life-expectancy tables. The new IRS life-expectancy tables demonstrate how the government assumes we will all live longer lives. As a result, retirement planning and retirement spending must adjust for longer living seniors as well.
CNBC’s Sarah O’Brien reports on how retirement accounts like 401ks and IRAs are affected by the IRS’ new calculations. Retirement accounts have RMDs, or required minimum distributions, where the minimum withdrawal amount is automatically deposited. This starts when the account holder reaches age 72. This isn’t anything new; however, it can get complicated when the IRS assumes you’ll live longer. RMDs are calculated by “dividing the previous year’s balance by a life-expectancy factor,” meaning the longer the life-expectancy the higher potential for a smaller RMD.
For example, the old table would divide a 75-year-old senior’s $500,000 IRA by a factor of 22.9. They’d receive a payout of $21,834. The new table would divide the same IRA by a factor of 24.6, resulting in a payout of $20,325.
Longer Living Seniors Need to Plan to Live Longer
This can be seen as a win-lose situation. Our retirement accounts last longer, but we have less money to work with month to month. Bear in mind, that this doesn’t factor in Social Security. However, no matter the bonus from your benefit, if your other revenue stream is smaller, it’ll be less money in general. If you’ve already been receiving RMDs, those payouts will adjust to be in line with the new life-expectancy tables.
Regardless of RMDs, a retirement planning rule-of-thumb is to always be saving more than you’re spending. That can be hard to do, especially as 2022 sees record high inflation. There are strategies that can help longer living seniors maintain their level of income. Increasing Social Security benefits to as high as they can go is a safe way to pad our savings. Most importantly, having a detailed understanding of savings and expenditures is critical to our retirement’s longevity, not just ours.