Longevity risk: What happens if you live longer than expected?

According to a recent report by the World Economic Forum, someone who was born in 2007 can expect to live to 103. That’s substantially more than the life expectancy of a person born in 1947, which is 85.

While living longer is a cause for celebration, it also poses challenges for planning a financially secure retirement – what happens, in other words, if you outlive the money you’ve been so diligent in saving?

There are several factors at play when it comes to longevity risk. There’s inflation and the decreasing buying power of retirement savings, of course. And there’s also the issue of cost of care, which can increase substantially the older we get.

One way I like to prepare my clients to begin thinking about their longevity risk is to ask who the oldest person in their family is – if Uncle Fred is 97 or Grandma Marge is 99, there’s a good chance they’ll live that long too. It’s something worth considering if you retire at 65 and want to ensure you have enough saved to live comfortably for another three decades – or more!

Life annuities issued by life insurance companies used to be the go-to solution to mitigate the risk of living longer than planned and running out of money – you deposit a lump sum of money and the insurance company pays you a guaranteed income for the rest of your life. However, most annuities pay a level income, which can therefore be subject to erosion from inflation. Also, with current interest rates at virtually zero, it can take a long time to get back more than your original capital deposit.

More recently, an innovative investment firm has designed a creative product called a longevity pension. While it’s not guaranteed, it does provide lifetime income in a similar way to an annuity – investors’ money is pooled together so you receive a regular income but if you die or decide to cash out, you only get your remaining capital back – the interest and returns earned stay in the pool to subsidize those who live a long time.

Another facet of the longevity risk I touched on earlier is factoring in long-term care into your retirement planning. This issue has understandably received a lot of attention during COVID but it was a concern even before the pandemic and will continue long after. The reality is only a small percentage of retirees will ever need to consider a nursing home as they grow older but if they do it can be a very expensive proposition, with costs hitting $12,000 or even $15,000 a month. These costs can usually be mitigated by selling their home to access a tax-free lump sum for the nursing home payments.

Finally, another vehicle to prepare for longevity risk is something called long-term care insurance, which is designed to pay a monthly income or a lump sum to help cover certain health-related costs as you grow older. It’s a type of coverage many of my clients, who’ve recently doled out substantial funds for care for their parents or grandparents, find particularly appealing. And, as with many insurance policies, the younger you begin, the lower the premiums, so it’s a solution worth thinking about long before you hit retirement.

If you’d like to discuss your longevity risk or you have questions about retirement and estate planning, please don’t hesitate to reach out to me at any time.