Longevity Risk: Planning for a Longer Retirement

As life expectancy continues to rise, longevity risk—the possibility of outliving your retirement savings—has become a central concern for retirees and those planning for retirement. However, with proactive planning, diversified strategies, and ongoing adjustments as circumstances change, you can take control of this risk. Here’s what you need to know and how to prepare, drawing on guidance from leading financial sources.

What Is Longevity Risk?

Longevity risk is the chance that you will live longer than expected and, as a result, run out of money during retirement. This risk is heightened by increasing life expectancies and the unpredictability of future health and market conditions (Investopedia). As retirees grow, individuals and institutions must plan for longer, potentially more expensive retirements (Investopedia; The American College of Financial Services).

Strategies to Manage Longevity Risk

1. Estimate Life Expectancy and Expenses

Start by realistically estimating your life expectancy and projecting how your spending needs may change over time. Many underestimate how long they will live, leading to undersaving and premature Social Security claims (The American College of Financial Services).

2. Diversify Retirement Income Sources

A well-balanced portfolio can help weather market downturns and generate lasting income. Consider income sources such as Social Security, pensions, annuities, and personal savings (Merrill Edge; Goldstone Financial Group). Delaying Social Security benefits until age 70 can maximize monthly payouts (Bankrate).

3. Consider Annuities and Guaranteed Income

Annuities, such as fixed, deferred, or qualified longevity annuity contracts (QLACs), can provide guaranteed income for life and help protect against outliving your savings (Thrivent).

4. Plan for Healthcare and Long-Term Care

Healthcare costs often rise with age. Medicare, supplemental, and long-term care insurance can help manage these expenses and protect your nest egg (Merrill Edge; Bankrate).

5. Adjust Withdrawal Strategies

The traditional 4% rule is a starting point, but you may need to adjust your withdrawal rate based on market performance, inflation, and personal circumstances (Kitces). Regularly reviewing and updating your plan is essential.

6. Address Both Longevity and Mortality Risk

For couples, plan for the possibility that one spouse may live significantly longer than the other. This can affect Social Security, pension benefits, and required portfolio withdrawals (Kitces).

Why Planning Matters

Research from the Center for Retirement Research at Boston College highlights that many retirees underestimate longevity and fail to insure against it, even though products like annuities can provide lifetime income (Center for Retirement Research). Longevity literacy, which refers to understanding how long you may live and what it means for your finances, is crucial for a secure retirement. It's not just about knowing your life expectancy, but also about understanding the financial implications of living longer than expected.

Conclusion

Longevity risk is a growing challenge, but with proactive planning, diversified income strategies, and regular reviews, you can help ensure your savings last as long as you do. This regular engagement with your plan will make you feel responsible for your financial future. Work with a qualified financial advisor to tailor your retirement plan to your unique needs and goals.

Sources

• Investopedia: Longevity Risk
• The American College of Financial Services: Planning for a Longer (and More Expensive) Retirement
• Thrivent: Longevity Risk—What It Is & How to Prepare
• Merrill Edge: 7 Steps to Get Ready for Retirement
• Goldstone Financial Group: Financial Strategies for Retirees
• Kitces: Assessing Longevity and Mortality Risk in Retirement Plans
• Bankrate: What is Longevity Risk?
• Center for Retirement Research: Longevity Risk (PDF)

Disclosure:
The information provided in this article is for informational purposes only and does not constitute investment, legal, or financial advice. The content is not intended as a recommendation to buy or sell any security or investment product. Readers should consult with qualified financial, legal, and tax advisors before making any investment decisions.

The views and opinions expressed are based on sources believed to be reliable, but their accuracy or completeness is not guaranteed. Any forward-looking statements are based on current expectations and projections, which may change without notice.

Investing involves risk, including the potential loss of principal. Past performance does not guarantee future results. The strategies or investments discussed may not be suitable for all investors.

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