Author: Rob Sevilla Agency: Agape Insurance & Financial Group, Tupelo, MS
When we talk about retirement planning, the conversation usually revolves around market crashes or inflation. But there is a quieter, perhaps scarier threat facing your retirement savings: Living a long life.
This is known as longevity risk. Put simply, longevity risk is the chance that you will outlive your money.
Decades ago, a pension and Social Security benefits might have been enough. Today, with the shift to defined contribution plans like IRAs and 401(k)s, the burden of ensuring your money lasts falls on you. Managing longevity risk is no longer optional; it is the cornerstone of security in your golden years.
At Agape Insurance, we help clients face the “Go-Broke” fear head-on. Below, we explore strategies you can use to ensure your retirement plan goes the distance, even if you live to 100.
Understanding Longevity Risk in Your Retirement
To successfully manage longevity risk, you must first respect the math. Life expectancies are rising. According to the Society of Actuaries and the Social Security Administration, a healthy couple at age 65 has a significant chance of at least one partner living to age 90 or beyond.
Living a long time is a blessing, but from a financial standpoint, it acts as a multiplier for other risks. A long life means more years of inflation eating your purchasing power, more exposure to market volatility in your stock portfolio, and a higher probability of needing long-term care.
If you underestimate how long you’ll live, you risk outliving your savings. This is why saving for retirement isn’t just about hitting a number; it’s about creating an income stream that doesn’t stop.
Estimating Life Expectancies and the Need to Save
It is difficult to predict how long we will live, but you need a baseline. You can contact the Social Security Administration or use an online life expectancy calculator to get a rough idea. However, financial planning should always assume you will live longer than expected.
If you estimate a 20-year retirement but live for 30, that extra decade requires substantial money in retirement. You need to save enough to cover that gap. A common mistake is planning for the average life expectancy; remember, 50% of people live longer than the average.
Managing Longevity Risk with Annuities and Pensions
The most effective way to combat longevity is to create your own pension. Since most modern jobs don’t offer a traditional pension plan, an annuity can fill that void.
An annuity is an investment option involving an insurance company. You make a deposit (often a single premium from your retirement savings), and in return, the insurer provides a guaranteed lifetime income.
For longevity risk, a specific type called a Longevity Annuity (or Deferred Income Annuity) is powerful. You might buy it at age 65, but delay payments until age 80 or 85. This provides security for your later years, acting as “longevity insurance.” It ensures that even if you deplete your other retirement accounts, you won’t run out of money.
Social Security Benefits: The Ultimate Longevity Hedge
Your Social Security benefits are arguably the best inflation-protected income stream in retirement.
While you can claim benefits starting at age 62, doing so results in a permanent reduction. If you are in good health and have a family history of longevity, it often pays to wait. Delaying until age 70 increases your monthly check significantly.
This higher guaranteed income floor provides security against loss of principal in your other investments. It is a key tool in risk management for those terrified of outliving your retirement savings.
Investment Strategy and Withdrawal Rates
Your investment strategy must balance growth and safety. If you are too conservative (all cash), inflation will erode your wealth. If you are too aggressive (all stock), a market crash could devastate your retirement outcomes.
Managing longevity risk also involves your withdrawal rate. Taking out too much money early in retirement drastically increases the chance of outliving retirement savings. Many advisors suggest a flexible withdrawal strategy that adjusts based on investment returns.
You might consider target-date funds or a diversified investment portfolio that includes low-risk assets. However, remember that investment advice should always be personalized to your risk tolerance and financial situation.
Long-Term Care and Financial Advice
Finally, longevity risk includes health risk. Living a long life often leads to frailty. Long-term care costs can drain a retirement portfolio faster than almost anything else.
Whether through long-term care insurance, a Health Savings Account, or a hybrid life insurance policy, you need a plan. Medicare typically does not cover custodial care.
Secure Your Future with Agape
Don’t let the fear of outliving your savings cast a shadow over your golden years. Managing longevity risk is about preparation, not prediction.
By optimizing your Social Security benefits, considering an annuity for lifetime income, and setting a sustainable withdrawal rate, you can ensure your retirement could last as long as you do.
Financial advice is crucial here. Contact Rob Sevilla at Agape Insurance to discuss your retirement readiness. We can help you estimate your needs, review your investment objectives, and build a retirement income plan designed for the long haul.
Call us today at 662.260.5188 to learn about longevity risk and secure your financial future.
Disclaimer: Agape Insurance & Financial Group does not provide tax or legal advice. Annuity guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. All investments involve risk, including the potential loss of principal.