What Is Longevity Risk?
In plain English
Longevity risk is the financial risk of living longer than your retirement savings can support. As life expectancies increase, retirees face the possibility that their portfolios, pensions, and Social Security benefits may not provide adequate income throughout a retirement that could last 30 years or more.
Why Is Longevity Risk Growing?
Average life expectancy has increased significantly — a healthy 65-year-old couple has roughly a 50% chance that one of them will live past 90. Traditional planning for a 20-year retirement is increasingly inadequate. Meanwhile, the decline of defined-benefit pensions shifts longevity risk from employers to individuals, making personal planning more critical than ever.
How Can You Manage Longevity Risk?
Key strategies include: delaying Social Security to maximize lifetime benefits (each year of delay increases benefits ~8%), purchasing a partial annuity for guaranteed income, using a conservative safe withdrawal rate, maintaining equity exposure for growth through a proper glide path, and planning for healthcare costs with an HSA.
What Role Does Healthcare Play in Longevity Risk?
Healthcare costs rise sharply with age and are a leading cause of retirement savings depletion. Medicare covers many expenses but not long-term care, dental, or vision. The average 65-year-old couple may need $300,000+ for healthcare in retirement. Long-term care insurance or dedicated healthcare savings can mitigate this component of longevity risk.
Frequently asked questions
How long should I plan for retirement to last?
Financial planners generally recommend planning for at least 30 years of retirement if you retire at 65. If you retire early or have a family history of longevity, plan for 35-40 years. It is better to overestimate your time horizon than to run short.
Does Social Security protect against longevity risk?
Partially. Social Security provides inflation-adjusted income for life, making it one of the best longevity protections available. Delaying benefits until age 70 maximizes this protection. However, Social Security alone rarely covers all retirement expenses.
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Related terms
Safe Withdrawal Rate
The safe withdrawal rate is the percentage of your retirement portfolio you can spend each year without running out of money over a typical retirement period.
Annuity
An annuity is a financial product that provides a stream of income payments, often used to guarantee income throughout retirement.
Social Security
Social Security is a federal program that provides retirement, disability, and survivor benefits funded by payroll taxes paid throughout your working years.
Glide Path
A glide path is the planned shift in a portfolio's asset allocation from aggressive to conservative as an investor approaches and moves through retirement.
Retirement Income
Retirement income is the money you receive during retirement from sources such as Social Security, pensions, investment withdrawals, and part-time work.