A long life is an amazing blessing to enjoy, but without proper planning, it can throw a wrench into your long-term retirement plans. Longevity risk is the chance of living longer than you expect and putting an unplanned strain on your retirement savings. In fact,
In this article, we'll explore what longevity risk is, how it affects your savings, and what you can do to help protect yourself.
Longevity risk & retirement savings
Living well in retirement is about balancing your income while making your savings last. Because you don't know exactly how long you'll live, estimating your life expectancy is important for retirement planning.
6 ways to plan for longevity risk
The best way to reduce longevity risk is to get ahead of it by planning. You'll need to estimate your expected retirement spending as well as your life expectancy and then add some extra.
Although you can't know for sure how long you'll live, you still can plan for retirement. But you need to make sure you account for the possibility of living longer than you expect to. Here are some strategies you can use to avoid running out of money if you live longer than you planned.
1. Have a strategy around the optimal time to claim Social Security
Social Security benefits can offer one small safeguard against longevity risk because you'll continue to receive those payments for as long as you live. Some people choose to delay claiming their benefit to maximize their lifelong monthly benefit amount because it offers some protection against running out of money.
For every year beyond full retirement age that you don't take Social Security—up to age 70—you can
- For more claiming considerations, read:
When to claim Social Security: Finding the right timing for you
2. Estimate what you can afford to withdraw from your retirement accounts
Because you'll likely need to keep the majority of your savings invested, it's important to think about how you'll take regular distributions from your accounts. Strategies that focus on a withdrawal rate, such as
3. Consider an annuity
The most direct way to reduce your longevity risk is by investing in income sources that are guaranteed for life.
Fixed indexed annuities: Has an interest rate that fluctuates based on the performance of a market index. If the index has positive returns, you may earn more interest than you would with a traditional fixed rate annuity. Multi-year guarantee annuities (MYGA): A fixed-deferred annuity that earns interest at a guaranteed rate for a specified period, typically three to nine years.
Deferred income annuities
Qualified longevity annuity contracts (QLACs)
For retirement with open-end dates
4. Factor in the other risks to your savings
Don't forget about other risks to your retirement savings. Planning ahead for certain unexpected or unknown expenses and market volatility can lessen their impact.
Health care costs.As you age, you'll likely spend considerably more on your medical expenses. Planning ahead for health care costs is important for protecting against outliving your nest egg. Specific health-related savings accounts and proper insurance, including Medicare supplements and long-term care, are all helpful approaches to consider. Taxes.Considering taxes in your retirement planning provides you with additional opportunities to be tax-efficient with your savings. It helps to not pay more taxes than you need to, further reducing your savings Inflation.Another key thing to consider as you're forecasting is inflation. Things inevitably will cost more in the future. You can reduce the negative impact of inflation on your plan by including an inflation estimate. This allows to you have a more accurate reflection of what the true cost of your future expenses might be and anticipate changes you might need to make. Market volatility.The stock market constantly fluctuates, and it sometimes can be drastic when looking at a short period of time. Including other assets such as bonds and annuities in your portfolio and holding sufficient cash you can withdraw from during downturns are excellent ways to protect your lifetime savings.
5. Continue to invest in growth assets during retirement
6. Monitor your plan regularly
Even with careful planning, your circumstances can change. You may find that your savings are dwindling too quickly. The good news is that a financial advisor can help monitor your plan and recommend adjustments, such as modifying your investments or cutting expenses to help you get back on track. This can prevent the need for more drastic changes later.
Some things you could do to adjust include:
- Cut your expenses. If you find that you are spending too much, you may be able to cut back. It may be that you are spending more than you realized on entertainment or gifts for family or taking more expensive trips than you planned. Some expenses may be harder to cut, such as your housing or utility costs. Reducing these likely would require you to make more significant decisions.
- Establish withdrawal guardrails. These can help you realize when you might need to reduce your withdrawals. For example, if your planned withdrawals for the year will be greater than 6% of your savings balance, you may decide to withdraw a lesser amount instead. This may relieve pressure on your investments and can have a big impact on how long your savings lasts.
- Take on some part-time work. Although the point of retirement for many is freedom from work, even a small amount of earned income from part-time work can go a long way in your retired years. You may find that working part-time is rewarding for social and emotional reasons as well.
Address longevity risk in your retirement plan
Longevity risk in positive terms is the great possibility of living a long life. Enjoying that possibility just requires some planning along the way so you have the financial confidence to sustain your lifestyle through those years.
To reduce your longevity risk, start by estimating your life expectancy and considering how your spending needs will change over time. Incorporate guaranteed income sources like Social Security, pensions and income annuities into your plan to protect yourself.
For help figuring out how much you need or how to craft a retirement income plan that specifically addresses your situation, you can rely on a