Meritage Periodical February 2025

Prompting critical thinking and conversations around issues in our industry.
Not intended as personal financial advice.

Planning For A Long Life

We are currently experiencing a time period with a tremendous amount of change happening in the world very quickly. Naturally, this can create anxiety for people and a shift to worrying about short-term market volatility. As financial planners, it is concerning to us that focus is becoming short-term in nature as it creates the risk of losing focus on long-term goals. While fluctuating portfolio balances introduce anxiety about running out of money in the future, we would argue the bigger risk to focus on is one’s own longevity. In our opinion, the impact of longevity risk is not talked about often enough in the financial planning community, so we wanted to share some perspective on it.

Many investors base their planning on simple rules of thumb, which always means planning based on what is “average.” This is problematic when it comes to longevity, because you may find yourself trying to pay for a 40-year retirement rather than the 20-year retirement you budgeted for.

It is difficult to plan for our future without knowing how long we are going to live, however, most of us would like to assume that our planning accounts for a favorable scenario in which we live a long and healthy life. Per the Social Security Life Expectancy Calculator, a baby girl born today has a life expectancy of 86.8 years. If she lives to age 67, her life expectancy rises to 90.4 years.

Most people appreciate that the longer you have lived, the longer you are projected to live. However, the impact of economic success on longevity is generally not accounted for in retirement planning, as the data provided represents an average of all Americans without accounting for socioeconomic differences. For example, there is a 14-year life expectancy gap between a 50-year-old woman in the top 20% of wage earners and a woman of the same age in the bottom 20% of wage earners. Studies are also showing that this gap is widening over time. Between 2001 and 2014, life expectancy increased by 2.34 years for men and 2.91 years for women in the top 5% of the income distribution, but only increased by 0.32 years for men and 0.04 years for women in the bottom 5%.

In 2024, a household income of about $130,000 put you in the top 20%. If you are fortunate enough to be healthy and in the top 20% of earners, it is reasonable to believe that you will live ten or more years past the average life expectancy. This is a wonderful problem to have, but also a major planning issue and something we would be happy to discuss in the context of your personal situation.

Updates and reminders that may impact your personal financial planning

SECURE 2.0 Act Introduced the Super Catch-Up Contribution

Retirement plan contribution limits are indexed annually and if you’re over 50, you may be eligible to make catch-up contributions—an important tool that allows you to contribute more than the standard limit to your retirement account. Starting in 2025, due to the SECURE 2.0 Act, if you’re between the ages of 60 and 63, you may be able to contribute even more, thanks to the new super catch-up provision.

Participants ages 60–63 during the calendar year may be eligible for the super catch-up provision. Meaning if you turn 60 within the year you are eligible, but if you turn 64 within the year, you are no longer eligible and the standard limit and catch up will apply. Your retirement plan will also need to allow for this new provision; so, please check with your plan sponsor to confirm.

For participants in 401(k), 403(b), governmental 457(b) the increased limit is the greater of $10,000 or 150% of the regular catch-up limit. For 2025, the catch-up contribution limit will increase to $11,250 ($7,500 * 150%). This brings the total contribution limit up to $34,750 ($23,500 standard + $7,500 catch-up + $3,750 super catch-up). Starting in 2026, these limits will be adjusted for inflation.

For SIMPLE plans, the increased limit is the greater of $5,000 or 150% of the regular catch-up limit. For 2025, the catch-up contribution limit will increase to $5,250 ($3,500 * 150%). This brings the total contribution limit up to $21,750 ($16,500 standard + $3,500 catch-up + $1,750 super catch-up). Starting in 2026, these limits will be adjusted for inflation.