Retirement Risk: Longevity (How Long You Live)
When planning for retirement, individuals often focus on investment returns, healthcare costs, and market volatility. However, one of the most significant yet frequently underestimated risks is longevity risk—the possibility of outliving one’s financial resources. This risk has profound implications for retirement planning, influencing everything from savings strategies to income distribution plans.
What is Longevity Risk
Longevity risk arises from the uncertainty surrounding life expectancy. While advances in healthcare, improved living conditions, and healthier lifestyles have generally extended average lifespans, no one can predict exactly how long they will live. This uncertainty poses a challenge: retirement savings must be flexible enough to support both shorter and significantly longer lifespans.
Depending on where you fall in the longevity spectrum can introduce various risks in your retirement plan as well.
If you live too long, in addition to needing to continue to support your lifestyle and needs, you increase the risk of experiencing large down markets, higher inflationary periods, large medical expense events, or some other unknown retirement risk.
If you die too soon, while you no longer to support your own needs, your plan may now need to deal with risks for a survivor such as higher taxes, higher individual cost of living, lost fixed income such as Social Security or a Pension, and lost support in the aging process leading to higher medical or care costs.
Why Retirees Underestimate Longevity Risk
Retirees often underestimate longevity risk for several reasons.
Wrong Base Number
Most people underestimate their life expectancies because they think about the more often publicized life expectancy from birth. However, in planning for retirement, a better number to use is the life expectancy to use is based on your current age. Let me illustrate.
Using the Longevity Visualizer from SSA.gov which uses life expectancy estimates for the general population in 2015 with projected advancements in medical technology, consider the differences between the life expectancy at birth for someone born in 1960.
| Life Expectancy | At Birth | At Age 62 | Difference |
| Male | 75 | 84 | 9 |
| Female | 80 | 86 | 6 |
Averages, Probabilities, and You
The second reason retirees underestimate longevity risk is that it’s difficult to know what number to use. Consider these facts about the age 62 male above:
- With an average life expectancy of 84, this means that half of the people age 62 will die before age 84 but half still be living.
- The most common age of death is actually at age 90
- At age 95, 1 out of 10 people are still living.
How to Address Longevity Risk
The first step is simply understanding it and changing your mindset. I hope that this article helped with that. Beyond that, the following is a short list of how to address longevity risk:
Diversified Income Streams: Relying on multiple income sources—Social Security, pensions, annuities, and investment income—can provide financial stability regardless of lifespan.
Annuities: Certain annuities offer lifetime income, providing a hedge against outliving assets. While not suitable for everyone, they can be a valuable part of a diversified retirement plan.
Total Return Investing: Investing for growth in long term assets can help to increase funds available for your future.
Delayed Social Security: Postponing Social Security benefits increases monthly payments, offering a higher guaranteed income for life, particularly beneficial if one lives longer.
Dynamic Withdrawal Strategies: Flexible spending rules that adjust withdrawals based on market performance and portfolio health can help preserve assets over varying retirement lengths.
Long-Term Care Planning: Considering insurance or setting aside specific assets for potential long-term care needs can protect against significant healthcare costs in later years.
Take Control of Your Retirement Future
Addressing longevity risk requires a holistic approach. Financial planners must incorporate realistic life expectancy estimates, stress-test portfolios against various scenarios, and regularly review and adjust plans. Scenario analysis can help identify potential shortfalls and guide strategic adjustments.
Comprehensive planning, adaptability, and informed decision-making are the keys to turning longevity from a risk into an opportunity for a fulfilling, worry-free retirement.
Don't let the uncertainty of longevity catch you off guard.