Why Longevity Risk Could Be The #1 Risk In Retirement
Most retirees share the same big concern when it comes to their golden years, which is… how do I avoid running out of money in retirement?
This concern is growing year over year, due to more people living a longer life than ever before. The average life expectancy has continued to increase over the years, and it's expected to carry on doing so as well.
One of the very first steps in most retirement plans is to make sure that you have enough guaranteed income throughout your retirement years. At an absolute minimum, you must plan to have enough guaranteed retirement income to cover your basic living expenses.
This article will discuss several important points that you should consider while planning for a full retirement.
By the way, if you’d like to learn how you can work towards a 0% tax bracket in retirement, watch our free video here.
What is longevity risk?
Statistics show that more and more people are living longer than ever before. This is due to a combination of things, and we can certainly expect this trend to continue in the future. With such rapid advances in medicine and technology, it is no longer a surprise to see some people living until age 100. Actual survival rates for people with serious health concerns has risen, which is part of the reason why life expectancies have improved so much.
The one big problem with living longer, however, is that you need more money to do so! Unfortunately, lots of people underestimate their life expectancy and end up running out of money in retirement. This tends to be an even bigger concern for women, who have a higher average life expectancy, and are therefore facing a bigger risk of running out of money.
Why is longevity risk so important?
Now, longevity risk could be the #1 risk in retirement. That’s because it’s a risk multiplier!
We’ve previously discussed the top 10 retirement planning risks to avoid. However, longevity risk can increase several of those risks even further. For example:
Tax Risk
Do you think that tax rates are going up or going down in the future? If you think they are going up, then living a longer life means that your retirement savings could be exposed to higher taxes.
Market Risk & Sequence of Returns Risk
The longer you live, the more years your money is subject to market losses. If the market crashes while you’re also withdrawing money, it can sometimes be hard to recover from this. (You can learn more here about how to avoid market risk.)
Inflation Risk
The average rate of inflation is around 3%, so your money slowly loses its purchasing power over time. The more years that your money is subject to inflation, the less value it has.
Long Term Care Risk
The older you get, the more chance there is that you’ll have some sort of health issue. So, living longer increases the chance of needing health care in retirement, which can be very expensive!
This is just a quick summary of how longevity risk, while a risk on its own, could also multiply several other retirement risks. So, there is a very strong case for this being the #1 overall retirement planning risk! Could this be the main concern in your own retirement plan?
Did you know? To avoid running out of money in retirement, there is a safe withdrawal rate that you should follow each year. That number used to be 4%, but research now shows it could be as low as 2.8%!
Why is retirement so different today?
Not too long ago, people used to retire quite happily. Once they reached retirement age, they had a pension that provided guaranteed income throughout their retirement years. Unfortunately, most companies over the years have stopped providing pensions. Now, they offer plans like 401(k)s.
The problem with these plans is that the employer has passed on the risk to the employee, so they now have to generate their own retirement funds. Employees no longer have a guaranteed income to look forward to, but instead have whatever is in their retirement accounts at retirement age, which over the years has been subject to market losses, fees, etc.
Did you know? Studies have shown that people live a happier and longer retirement when they have guaranteed income.
As pension plans have mostly become a thing of the past, they are no longer a form of guaranteed income in retirement for most people to rely on. Therefore, you have to rely even more on Social Security income. You should always try to work with a financial professional that discusses Social Security maximization in detail, as not every financial advisor will do so. There are several strategies to use for maximizing your Social Security income, depending on your own personal circumstances. If you’re one of the lucky ones to still have a pension as well, then you could also look into pension maximization.
Retirement portfolios can include a combination of defined benefit plans and defined contribution plans, among others. People reaching retirement age are usually looking to take less financial risks as they don’t want uncertain cash flows, and instead want more guarantees. They rely on their Social Security and pension fund for guaranteed income, and with the number of people with pension funds decreasing over the years, it is more important that ever to have a complete retirement plan.
How can I avoid longevity risk?
If you find that the guaranteed income from your Social Security and pension plan is not enough to cover your living expenses, then you need to consider adding your own guaranteed income stream to fill that gap. Think of this like setting up your own private pension, to provide you with a guaranteed income for the rest of your life.
Now, there is one specific type of company that can offer these products. They can protect your assets from market losses, plus allow continued growth and provide lifetime income when needed. By having more guaranteed income, you can also take more risks with the rest of your retirement portfolio. So these products can actually help your overall portfolio perform better, while also providing more safety. Annuities are great for reducing longevity risk, and there are a wide range of products (including a fixed indexed annuity, a single premium immediate annuity, etc.), so speaking with a financial professional is recommended.
You can transfer longevity risk over to the insurance company issuing your product, as they will then become responsible for providing your lifetime income stream.
Be sure to watch this video here and learn more about how you can do this.
Can I afford to live a full retirement?
If you’re concerned about running out of money in retirement, or possibly not having enough guaranteed income to cover your basic living expenses, then we can assist. By transferring longevity risk to the insurance companies, we are able to help manage longevity risk in your retirement portfolio.
You can schedule a free retirement consultation today and speak with a professional who specializes in reducing and eliminating retirement risks.
If securing more guaranteed income is your goal, then we can help you set up a reliable income stream for the rest of your life!
