You always hope to enjoy a long and healthy retirement and might even want to leave a legacy behind to your beneficiaries. This is possible if you take into account how longevity risk can impact your financial stability.
Longevity risk is an important factor in retirement planning, especially since average life expectancies continue to increase. In this article, we’ll cover what longevity risk is, why it matters, and how you can use different strategies to manage it in retirement.
What Is Longevity Risk?
Simply put, longevity risk is the chance you’ll run out of money during retirement. Thanks to advancements in medicine and technology, you might live longer in retirement than you expected when you began saving. Living longer is a great thing, but it also means there’s a possibility that you could lose the ability to support yourself even after working your whole life.
Insurance companies and pension funds also consider longevity risk in their planning. Pension plans and annuities can provide income for life, so providers try to forecast what they’ll pay out accurately. Increasing longevity risk may lead to higher costs for pension sponsors and annuity providers that promise lifetime income. Companies offset higher costs by passing them on to the consumer. In this case, insurers who sell annuities may have to adjust their fee structure, the interest rates they credit, or the amounts they pay in lifetime income to annuitants.
How Average Lifespans Have Changed Over The Years
Longevity risk is becoming more of an issue as U.S. citizens are living longer and enjoying more years in retirement. In fact, the national life expectancy rose from 69.7 years in 1960 to 79.3 years in 2024 and is predicted to increase to 82.2 years by 2054.
Another useful metric is life expectancy at age 65, which is how long a person is expected to live after they reach age 65. Based on changes in total life expectancy, retirees today and professionals looking to retire in the future should plan on a retirement of about 20 years or longer.
Why Longevity Risk Matters In Retirement Planning
Retirement has inherent uncertainties. You might deal with an unexpected health issue or move to a state with higher taxes. However, adequate planning can help you enjoy life with fewer concerns about your finances. With the right plan, you can maintain confidence through rising healthcare costs and market volatility. You can also protect against inflation risk and maintain purchasing power as the years go by.
Longevity risk is so important that the Social Security Administration has gradually raised the full retirement age from 65 to 67 to compensate. This is the age when you can get full monthly benefits from Social Security. It’s possible the government could increase the retirement age again in the future or lower benefits. These changes make it even more important to have a solid financial plan in place before you retire.
Longevity risk has also caused many pre-retirees to consider delaying full retirement until later in life. Older people who in previous generations may have completely left the workforce at 65 are today healthy enough to continue working part-time or even full-time. Continuing to earn a salary enables your retirement savings to potentially earn more interest and last longer. Also, lifetime annuity payments will be higher the longer you wait to start payouts.
How To Consider Longevity As You Plan
Managing longevity risk in retirement involves knowing how much you need for living expenses each year and estimating your longevity. While no one can predict the future, you can take a realistic look at how long you expect to live in retirement in the best-case scenario.
You can use longevity calculators like the Social Security Life Expectancy Calculator and the American Academy of Actuaries’ Longevity Illustrator to estimate your life expectancy. The Longevity Illustrator shows your probability of reaching different ages, which is particularly useful. After all, your financial plan might change after seeing you have a 50% chance of reaching age 90.
How To Protect Your Retirement Savings Against Longevity Risk
Consider withdrawal strategies, tax strategies, and portfolio diversification to protect against longevity risk in retirement.
- Sustainable withdrawal strategies: Common retirement withdrawal strategies include the 4% rule, where you withdraw 4% of your overall retirement savings the first year you retire and increase your withdrawal amount each subsequent year to account for inflation. You can also use a fixed-dollar strategy and take out the same amount each year.
- Tax strategies: You can minimize taxes and extend retirement income depending on which accounts you use first. One option is to withdraw from taxable, tax-deferred, and tax-exempt accounts in that order and exhaust one before moving to the next. Another is to withdraw from each type of account every year.
- Portfolio diversification: Diversify your retirement portfolio with assets like equities, CDs, and bonds to limit risk exposure. If one investment performs poorly, other parts of your savings can help make up the difference. Adding an annuity to the mix can provide more income security.
- Debt management: When possible, it’s best to enter retirement with little to no debt. This way you have fewer bills to pay and you’re not spending limited retirement dollars on interest payments for past purchases.
The Role Of Annuities In Long, Prosperous Retirements
The advantage of having an annuity in retirement is a guaranteed income. You can purchase an annuity from an insurance company and decide whether you want payments to begin immediately or after a tax-deferred accumulation period. Here are a few benefits of having annuity income during retirement:
- Guaranteed income: Annuities provide guaranteed income payments for a set period or the rest of your life depending on the contract.
- Tax-deferred growth: Your contributions to an annuity earn interest tax-deferred until you annuitize your account and start to withdraw payments.
- Shelter from market volatility: Many annuities like fixed and indexed annuities include features to shelter you from the market’s ups and downs and can diversify your retirement portfolio.
- Beneficiary perks: Some annuity riders let you leave income to your beneficiaries. Your spouse can continue to get payments for some time or as long as they live with a joint lifetime income benefit rider.
Is an Annuity Right for You?
Annuities can turn retirement funds into a guaranteed income stream, so you don’t have to worry about outliving your retirement savings. The right type of annuity for you depends on your proximity to retirement, current investments, and goals. Reach out to a trusted annuity expert today to see if an annuity makes sense for your retirement plan.
Note: All guarantees are subject to the claims-paying ability of the insurer.
Note: Any reference to the taxation of annuities in this material is based on Annuitiy.com’s understanding of current tax laws. We do not provide tax or legal advice. Please consult a qualified tax professional regarding your personal situation.
Note: Riders may be subject to eligibility and underwriting requirements, additional premium requirements and/or minimum or maximum coverage amounts. Availability and rider provisions may vary by state.
