Imagine this: you retire at 65, healthy and happy, with a plan in place to fund your lifestyle until age 82. Then life throws you a curveball—in the best way possible—you live to 92. That’s ten extra years of expenses. The question is: will your money last?
This is what we call longevity risk—the risk of outliving your retirement savings.
The Big Unknown: How Long Will You Live?
None of us has a crystal ball. Planning for retirement would be much simpler if we knew exactly how long we’d live. But we don’t, and that uncertainty makes it tricky to ensure your money lasts as long as you do.
Interestingly, people are starting to catch on. A 2013 study by the Center for a Secure Retirement found that middle-income Americans nearing retirement estimated they'd live to about 86. That’s actually a bit above the average, so the awareness is improving.
Back in 2003, only 23% of people saw longevity risk as a major concern. By 2011, that number jumped to 62%. Clearly, more folks are waking up to the idea that outliving their money is a real possibility.
What Do the Stats Say?
According to the Social Security Administration:
- If you're a 65-year-old man, you can expect to live to about 84.
- A 65-year-old woman? Around 86.6.
But that’s just the average. Here’s where it gets real:
- 1 in 4 people will live past 90.
- 1 in 10 will make it past 95.
You can check your own life expectancy using tools like the Social Security calculator or Living to 100, which even factors in lifestyle and health.
So, How Do You Plan for the Unknown?
There’s no one-size-fits-all answer, but here are a few solid strategies to help safeguard against longevity risk:
1. Plan for a Longer Life
- Start with a realistic view of your own life expectancy. That means looking beyond general stats and considering your health, family history, and lifestyle. Planning until at least age 90 (or longer if you’re cautious) gives you a better buffer.
- Yes, this might mean saving more or withdrawing less from your portfolio each year. But it beats the alternative—running out of money at 85 with years still ahead.
2. Build Lifetime Income Streams
One of the most effective ways to protect against outliving your savings is to build income streams that last as long as you do. Here are a few options:
- Delay Social Security: For each year you wait past your full retirement age (up to age 70), your benefit increases. Plus, Social Security adjusts for inflation and continues for life—yours and, in many cases, your spouse’s.
- Choose a Life Annuity: These can come from employer retirement plans or be purchased privately.
Options include:
- Immediate annuities: Start paying out right away.
- Deferred income annuities: Purchased in advance, but don’t kick in until a later age (say, 80). This is a cost-effective way to guarantee income later in life.
- Use a Deferred Annuity with Lifetime Income Riders: These allow you to grow your money now while securing guaranteed lifetime income later.
- Don’t Overlook Life Insurance: If you have a permanent life insurance policy, you may be able to convert its value into a lifetime income stream tax-free under certain conditions.
3. Tap Into Non-Lifetime but Flexible Income Sources
Not all income sources are guaranteed for life, but they can still provide valuable longevity protection:
- Reverse Mortgages (HECM): Particularly the “tenure” option, which provides monthly payments for as long as you stay in your home.
- Rental Income: Whether it’s a basement apartment, a vacation rental, or commercial property, this can be a great long-term income stream.
- Dividends and Business Interests: Stocks that pay regular dividends or revenue from businesses and royalties can provide ongoing cash flow.
4. Smart Withdrawal Strategies
Planning to live a long time? You’ll need a smart approach to how much you withdraw from your portfolio.
- Stick to a conservative withdrawal rate. A 4% rule is common, but the longer your expected retirement, the lower this rate should be.
- Adjust in down markets. Reducing withdrawals when the market is down can help preserve your nest egg.
- Consider increasing equity exposure slightly for long-term growth—just make sure it matches your risk tolerance.
5. Set Up a Contingency Fund
Think of this as your “just in case I live longer than expected” fund. You don’t touch it unless you need it later in retirement. You can build it with:
- A diversified investment portfolio
- Life insurance cash value
- A reverse mortgage line of credit
Final Thoughts
Longevity risk is real, but it doesn’t have to be scary. With thoughtful planning and a smart mix of income sources, you can enjoy retirement with confidence—knowing that your money is just as ready for the long haul as you are.
If you're unsure how your current plan stacks up against the possibility of living to 90 or beyond, let's talk. I'd be happy to help you create a strategy that protects your future and gives you peace of mind—no matter how long your retirement lasts.