The increasing life expectancy of retirees often presents a sobering challenge: what if you outlive your savings? Known as “longevity risk,” this may be a concern financial planners and retirees may grapple with daily.

Understanding Longevity Risk: The Hidden Challenge of Living Longer

Living a long, healthy life is a blessing—but in financial terms, it may also be a significant risk. Longevity risk is the potential for outliving your retirement savings.

Why Longevity Risk Matters in Retirement

Unlike other retirement risks, longevity risk becomes more significant as you age and stay healthy. This dynamic risk may grow exponentially over time, especially once you reach an age where your expected mortality may increase sharply. Many retirees underestimate how much they will need to fund their longer-than-expected lives.

According to most actuarial data, a 65-year-old couple today has a 50% chance that at least one of them will live to age 90. 

Longevity risk is often called the “risk multiplier.” It intensifies the longer you live. Longevity compounds with other risks like inflation, healthcare costs, and market volatility.

Making Longevity Risk Personal: Why It Matters to You

Many retirees may underestimate the financial impact of living longer than expected. Imagine planning for a 20-year retirement only to find yourself in year 25 with little to no resources left.

Longevity risk isn’t just a theoretical concept; it may be a practical reality that may require careful, proactive planning to manage. Understanding these implications can help retirees take proactive steps to safeguard their financial future, maintain their desired lifestyle, and provide lasting support for their loved no matter how long they live.

Why Longevity Risk Matters Financially

Longevity risk may be a very real and pressing issue for retirees. Beyond the emotional toll of worrying whether your money will last, it may have other practical implications that might significantly impact your retirement years:

1. Financial Instability

The longer you live, the greater the chance may be that unexpected expenses will arise—whether it’s a major medical bill, costly storm damage to your home, or a legal matter. Without adequate resources, these shocks can strain your finances and may force difficult decisions, like cutting back on essentials or dipping into savings you intended to preserve.

2. Reduced Standard of Living

Running out of money in retirement may mean scaling back on the lifestyle you worked hard to create. Whether it’s downsizing your home, forgoing travel, or cutting back on dining out, a diminished standard of living may take an emotional and psychological toll. By custom designing a plan for longevity, you may strive to use limited resources more prudently and help reduce the risk of major lifestyle adjustments.

3. Inflation’s Growing Impact

The longer you live, the more susceptible you may be to the effects of inflation. Rising prices for everyday goods and services can erode the value of your savings, making it harder to maintain your standard of living. While Social Security benefits are adjusted annually for inflation, the increase may not fully cover your needs, leaving you to bridge the gap.

Two Paths in Retirement: A Story of Financial Choices

Meet Diane and Carol, two retirees who had similar career paths, incomes, and retirement goals. However, their financial journeys in retirement couldn’t have been more different.

Diane retired at 65 with a comfortable nest egg. She followed the common advice of withdrawing 4% annually from her investment portfolio to cover her living expenses. For the first decade, everything went according to plan. Then the unexpected happened.

A sharp market downturn cut the value of Diane’s portfolio by nearly 30%. Concurrently, inflation drove her living costs higher. At the same time, an unexpected medical issue required a significant out-of-pocket expense. With her savings dwindling faster than anticipated, Diane found herself cutting back on essentials, selling her home, and relying more heavily on Social Security.

By her mid-80s, she faced the very real fear of outliving her remaining funds. This forced her to make difficult choices about her standard of living.

Carol, on the other hand, took a different approach. Before retiring, she worked with a financial planner who introduced her to strategies that protected against longevity risk.

Carol allocated a portion of her retirement savings to purchase a deferred income annuity. This guaranteed her a stream of income starting at age 70, regardless of how long she lived.

She also set up a buffer asset for long-term growth—a separate, low-risk account specifically reserved for unexpected expenses, like medical bills or home repairs. With these strategies in place, Carol enjoyed a more secure retirement.

Even as the markets fluctuated, she knew she had a safety net. The annuity provided predictable income during her retirement years, allowing her to maintain her lifestyle without fear of running out of money.

By her mid-80s, Carol wasn’t just surviving—she was thriving. She traveled to visit her grandchildren, donated to causes she cared about, and lived comfortably in her home without worrying about her finances.*

*A fictional story created by Judy Carlson

The Bottom Line: Planning for a Longer Life

With lifespans steadily increasing, running out of money in retirement may no longer be just a distant fear. It may be a harsh reality for many aging Americans. Longevity risk may feel daunting, but it doesn’t have to be paralyzing. While it’s nearly impossible to eliminate the risk of outliving your savings, there are proactive steps you may take to seek to minimize its effects and help provide a stable financial future.

Start by aiming to understand how long your money may need to last and design a plan that may account for inflation, unexpected expenses, and market volatility. Incorporating guaranteed income solutions, like annuities or pensions, may provide a sense of confidence that comes from knowing you’ll have a steady paycheck no matter how long you live.

Remember, longevity may be a gift—especially when supported by a thoughtful and well-structured financial plan.

I encourage you to reflect on your own potential longevity risk. Reach out today to consult with a professional financial planner who will strive to tailor solutions to fit your unique circumstances.