Will Your Government Or Private Pension Take You To Age 100?

“Living to 100, or longer, is no longer a rare occurrence.  Will your current retirement plan accommodate thirty or forty years without a paycheck?”– Angie Politarhos

If your lifespan significantly exceeds your life expectancy, your wealth is exposed to something known as “longevity risk.” While modern income and retirement planning technology has improved over the years, it still cannot accurately predict the future, especially when it comes to longevity risk. There is a great degree of uncertainty associated with trying to estimate how long someone will live.

Unfortunately, longevity risk has significant negative consequences, especially for federal employees and other individuals with defined contribution plans (pensions). The degree of this uncertainty never remains static, and tends to shift over time with mortality rates.  Healthier lifestyles, technological advances, greater access to healthcare, pandemics, increases in fatal accidents or illnesses all create fluctuations in the mortality rate. For example, between March, 2020 and January, 2021, the United States experienced 22.9% more deaths than in previous years. This pandemic-related spike resulted in US life expectancy decreasing by two years, the greatest decrease since 1943.

What does this mean for employees with pensions?

Direct compensation plans generally leave the individual to understand and plan for longevity risk and its’ many complications. However, most of us, for one reason or another, don’t fully comprehend longevity risk and fail to include it in planning. The financial cost of living longer than expected has some potentially adverse consequences once a person has retired. The most obvious negative effect of ignoring longevity risk is that many individuals will outlive their savings, while others could lower their lifestyles in retirement by underspending.

While improved life expectancy is one factor which increases longevity risk, many people are also poor at estimating how long they think they will live. A recent study by the American Society of Actuaries has found that more than half of pre-retirees and retirees underestimate how long they will live.  Underestimating your lifespan means that your financial time horizons will be much too short.

Could adding an annuity be a solution?

Pensions, particularly government pensions, come with a lot of moving parts. Employees face the daunting and frustrating task of organizing and deploying their benefits to ensure they last even if they live longer than expected. An array of products and services must be researched and considered as employees enter the spend-down phase of their lives and face the challenge of longevity risk. Unfortunately, most pension plans have not adequately addressed the longevity issue and many do not offer products to add lifetime income streams.

If you are a federal or state employee or enjoy a private pension, you might want to do what an increasing number of people in your situation are doing and add an annuity to your retirement matrix.

For many retirees, adding a fixed-index or other type of annuity can fill in the gaps and protect against the risk of outliving their savings.  Annuities provide guaranteed, tax-advantage and structured lifetime income, protecting you against the possibility of outliving your resources. Some specially-designed annuities will also provide you with solutions to long-term care needs.  If you’re worried about “locking up” your money in an annuity, be aware that most modern annuities offer increased flexibility by allowing you to withdraw as much as 10% with no penalties.

The Bottom Line:  Failure to take longevity risk into account when planning may mean that your pension won’t be enough to sustain you when you retire.  It’s a wise idea for anyone who has a pension to have an advisor look over your plan.  Your advisor can help design a blueprint to ensure that your income stream will be adequate to meet your expectations when you leave the workforce. If you have a federal pension, be sure to connect with an advisor who specializes in the intricacies of those plans and can assess your situation accurately.  Ask your advisor if adding an annuity product would help ensure that you don’t run out of money, even if you live to 110.