“Many people who carefully plan for their income needs in retirement do so based upon a fixed retirement horizon of average life expectancy and thus might give short shrift to the significant probability of living longer.” – American Association of Actuaries
Blues legend Albert King once observed, “Everybody wants to go to heaven, but nobody wants to die.” In our post-COVID 21st century world, it might be more accurate to say, “Everybody wants to live a long time, but no one wants to know how much that might cost.”
Many people say they want longevity. And why wouldn’t they? If a person is in good health and has created reliable income streams for retirement, living longer is an attractive proposition.
Approximately half the United States population will live longer than the average life span. Unfortunately, a lot of those people are ill-prepared for the consequences associated with a longer life.
In 2013, the math nerds over at the American Association of Actuaries published a report entitled “Risky Business: Living Longer Without Income for Life” (https://www.actuary.org/sites/default/files/files/Risky-Business_Discussion-Paper_June_2013.pdf) that outlined just some of the risks associated with living too long.
The report outlined some of the most obvious risks of living too long without adequate planning. These risks include:
- Outliving income provided by assets. Outliving income will result in a retiree becoming reliant on Social Security for income, having to go on public assistance, or turning to family and friends for help. Most seniors want financial independence in their later years, so creating an income plan is critical if they’re going to achieve that independence.
- Risks of poor asset performance. While it’s fantastic when seniors have managed to put together healthy, balanced portfolios, it’s challenging to predict how those assets will perform once retirement time arrives. Best-case scenarios contemplate the optimum performance of assets. Unfortunately, that doesn’t always happen. Stock market volatility remains a clear and present danger to your wealth.
- Health care cost increases. In years past, if a person could squeak by on health care issues until they reached 65, they could count on Medicare. State and national deficits, a glut of people turning 65, and healthcare system weaknesses exposed by the pandemic will almost certainly require changes to Medicare now and in the future. Staying healthy in retirement is going to cost more than ever before.
- Inability to manage finances as we age. A lot of people forget that as humans grow older, we tend to lose some cognitive function. That means as time goes by, many people are unable to manage their finances actively.
- Difficulty in living within a budget. Even the most well-thought-out budget cannot anticipate all of life’s curveballs. That’s why many retirees report stress when attempting to adhere to a strict budget. Going over budget, even occasionally, causes shortfalls in income that often can’t be addressed.
Longevity risk is a tough thing for most of us to contemplate. However, failing to understand and prepare for this risk is not an option if you want to create a profitable and stress-free retirement.
What can you do, then, to protect yourself against longevity risk? Well, first and foremost, you insure your retirement.
You purchase life insurance to protect against the loss of a breadwinner’s income. You wouldn’t think of owning a house without homeowner’s insurance. Why then would you ignore the risk of outliving your money and not insure against longevity risk?
So, what constitutes “insurance” against living too long?
Specially-designed, dividend-paying whole life insurance with a guaranteed death benefit. Cash-value life insurance gets a lot of negative press—most of that negativity surrounding how that product is sold. Often, salespeople (vs. trained insurance advisors) push permanent life insurance as an investment rather than as a means of protecting and preserving wealth and creating a legacy.
The guaranteed death benefit aspect of these policies gives you some breathing room to spend your principal without worrying about leaving your spouse destitute. The death benefit provides for the replacement of any principal you deplete.
For example, say you purchased a $1 million guaranteed permanent life insurance policy. You could spend $1 million of your other assets. Upon your death, your spouse would have the money replaced by the insurance policy.
Annuities help ensure you have income in retirement.
Another way to protect your income in retirement is to purchase an annuity. If you bought a $1 million annuity when you were between 65-70, that annuity would pay out somewhere in the neighborhood of $80,000 for as long as you live. If you die earlier than expected, your spouse gets a death benefit.
Annuities are a great way to ensure your retirement because if you live a longer life than expected, you will get back more in benefits than you paid in premiums. As with most income protection products, there are many more types of annuities than there were in the past. Each of them can solve a particular problem in retirement. You need to consult a specialist in these products to discover which one is right for your unique circumstances.
Charitable Remainder Trusts. If you like to give back to society, a Charitable Remainder Trust is an excellent choice for income protection.
This kind of trust works similarly to an annuity. You place a predetermined amount of money into a trust that you’ve created. When you pass, the designated charity keeps what remains in the trust. Your beneficiaries get an income-tax-free death benefit. This wealth replacement strategy also has numerous tax advantages that make it appealing, especially to higher-net-worth individuals.