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Protect Your Retirement From Longevity Risk


A successful retirement means living out your days happily without running out of money. Longevity risk can throw a wrench in your retirement plans with the possibility of outliving your funds. The good news is that you can factor this risk into your retirement plans. If you need help creating a plan that considers longevity risk, check out SmartAsset’s free financial advisor matching tool.

What Is Longevity Risk?

Longevity risk is the possibility that actual survival rates will exceed life expectancies. Of course, that points to an obvious problem of running out of retirement funds when you still have plenty of years left. Pension funds, insurance companies and individuals planning for retirement have to consider longevity risk when mapping out how long funds will last.

The main factors considered are trends of increasing life expectancy and declining mortality as well as a growing number of people reaching retirement age.

Pension funds and insurance companies use complicated analysis tools to predict the possible outcomes of longevity risk. But increasingly, the growing risk is deemed unacceptable by these major entities. You can see the result of this growing risk in rising premiums for long-term care insurance and other insurance products and a shrinking number of defined benefit plans.

Why Longevity Risk Matters

Longevity risk is a problem for pension funds and insurance companies. Each faces longevity risk when increasing life expectancy results in higher payouts than originally anticipated. If the payouts are too much higher than expected, the pension fund or insurance company could experience solvency issues. And unfortunately, solvency issues could lead to devastating consequences for the pensioners or policyholders relying on payouts.

The trend of increasing longevity has encouraged a shift away from defined-benefit plans. A defined benefit plan offers employees a guaranteed retirement benefit, typically referred to as a pension. Although still somewhat common in the public sector, finding a private company that currently offers new employees a defined-benefit plan is like finding a needle in a haystack.

Instead of defined benefit plans, more employees now access defined-contribution plans with no guarantee of a future payout. Or in some cases, employees are left to save for retirement entirely on their own. And with that shift, the risk of outliving retirement funds is passed from a pension fund to individuals saving for their own retirement.

And that means individuals must consider the finances of a potentially long retirement. The unfortunate reality is that outliving your retirement funds is a growing possibility. Before you enter your golden years, planning for a lengthy retirement is a good idea. If you underestimate the amount you’ll need, that’s a bigger problem than overestimating.

Protecting Your Retirement

Protect Your Retirement From Longevity Risk

So, how can you protect your retirement from the possibility of outliving your savings? Firstly, take a realistic look at your life expectancy. In general, people are living longer now. Although life expectancy dipped due to the COVID-19 pandemic the longer-term trend is to a greater lifespan. Of course, no one knows exactly how many days they have left. But planning for a long retirement is a smart move.

Secondly, the key to protecting your retirement is saving early and often and perhaps making some tough decisions about spending. Make saving for your future retirement a priority. Financial experts often recommend setting aside at least 10% to 15% of your income towards retirement savings. But that’s just a rule of thumb to get you started. Everyone has a unique financial situation. And with that, you might decide that you need to save more or less of your income to propel you towards retirement. For example, let’s say you want to retire at the relatively early age of 60. In that case, you’d likely need to save more than if you planned to retire at 70.

Thirdly, make sure your asset allocation is likely to support you throughout your retirement. You may need to have securities, like equities, with the potential for capital appreciation. Or you may need to reduce the risk of your investment portfolio and increase the proportion of bonds you’re holding. A financial advisor can be invaluable as you make these kinds of decisions.

Lastly, consider insurance products that are designed to tackle longevity risk.

  • Qualified longevity annuity contract (QLAC) – Unlike an immediate annuity, a QLAC is a deferred annuity, meaning it doesn’t start paying until some time after you pay for it. A QLAC is funded using pretax dollars from an individual retirement account (IRA) or 401(k) account, hence the “qualified” part of its name. It’s important to note that you can’t use after-tax dollars from a Roth IRA or money from an inherited IRA to purchase a QLAC.
  • Single premium immediate annuity (SPIA) – A SPIA is designed to supplement retirement income. However, with a SPIA, the annuity purchaser invests a large cash lump sum up front and elects to begin receiving payments within a year. This means SPIAs skip the accumulation phase and go directly to the annuitization phase. You choose the frequency and duration of your annuitization payouts. An immediate annuity most commonly guarantees payments for the rest of your life, but you may also have the option of continuing payouts to your spouse or heirs if you die before a certain period of time has elapsed.

The Bottom Line

Protect Your Retirement From Longevity RiskRetirement can get expensive quickly. And longevity risk can put even more pressure on your nest egg. Preparing for this possibility can help you enjoy your retirement with enough funds to rely on. Consider saving more and spending less as options to prolong your retirement funds. Carefully analyze your asset allocation, and consider insurance products designed specifically to address longevity risk.

Tips on Retirement

  • Longevity risk poses a threat to retirement plans. Consider working with a financial advisor to mitigate this risk. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Our retirement planning calculator can help you understand how much you’ll need to save for the retirement you’ve been waiting for.

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