What Is Longevity Risk and How Can You Mitigate It?

Posted May 17, 2022


Every so often, the media will announce that Americans are living longer than ever before. It’s true that recent headlines report shorter life spans because of COVID-19. But over the very long term (i.e., a 50-100 year big picture), people are living longer, thanks to improvements in medicines, medical technologies, and lifestyle choices. 

How much longer? The Center for Disease Control and Prevention (CDC) issued the following numbers for 2019 (the most recent official numbers available):

  • Overall life expectancy is 78.8 years
  • Women are expected to survive to 81.4 years
  • Men are expected to survive to 76.3 years

Furthermore, a report from the U.S. Census Bureau indicated a life span increase, with the U.S. population expected to live to 85.6 years, on average, by 2060. Other reports extend lifespans, with the probability that men could live to age 87 or above, while women could survive well into their mid-90s and beyond.

The issue is that people are surviving well into their 8th, 9th and even 10th decades. This is great news from a longevity standpoint. From a longevity risk standpoint, not so much.

Defining Longevity Risk

Even as survival rates increase, finances might not have the same staying power. This is where longevity risk comes into play. Longevity risk occurs when people’s lives surpass their savings or funds. Longevity risk presents the possibility that individuals living to an advanced age will deplete their retirement savings. 

Long lives are one factor driving longevity risk. The other is the employer shift away from corporate pensions (also known as defined benefit plans) to defined contribution plans (such as 401(k) and individual retirement accounts). This means that employers no longer carry longevity risk. Rather, it’s up to individuals to understand, and mitigate, potential longevity risk.

One challenge is that many individuals tend to underestimate their life expectancies, meaning they could outlive their assets. The other is that many adults aren’t even financially prepared to retire. More research from the Census Bureau indicates that 49% of adults ages 55 to 66 had no personal retirement savings in 2017. This means that these adults will likely end up working longer. However, working into one’s 70s or 80s isn’t necessarily an ideal method to combat longevity risk.

Potential Longevity Risk Mitigation Strategies

Googling the term “longevity risk mitigation” brings up a wealth of articles and advertisements. Many of these results have one piece of advice. Namely, to delay filing for Social Security benefits for as long as possible.

If you’re a U.S. citizen, you could file for Social Security benefits as early as age 62. But experts suggest that you wait to file until at least age 70

There are a couple of reasons why waiting might be advantageous. First, filing early means a permanent reduction in benefits as high as 25%-30%. Second, Social Security could reward you for waiting, by adding an 8% delayed retirement credit to your monthly payout. 

What if you’re bound and determined to retire earlier than age 70? You could still delay filing for Social Security benefits with the following strategies: 

  • Withdrawal from your defined benefit plans or defined contribution plans 
  • Purchasing a single premium income annuity (SPIA) at least a year before retirement, and benefit from the annuity’s payouts to help bridge the gap between retirement and Social Security filing
  • Using the equity from a reverse mortgage on your home

The takeaway from this article is that you stand a good chance of outliving your assets. Given that, waiting to file for Social Security is one way to help mitigate longevity risk. Additionally, retirement preparation should consider timing, as well as value and cash flow.

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice, meeting the particular investment needs of any investor. There is no guarantee that the investment objectives of any particular program will be achieved. The actual amount and timing of distributions paid by programs is not guaranteed and may vary. There is no guarantee that investors will receive distributions or a return of their capital. These programs can give no assurance that they will be able to pay or maintain distributions, or that distributions will increase over time. A fixed annuity is intended for retirement or other long-term needs. It is intended for a person who has sufficient cash or other liquid assets for living expenses and other unexpected emergencies, such as medical expenses. A fixed annuity is not a registered security or stock market investment and does not directly participate in any stock or equity investments or index. Any guarantees or benefits provided are subject to the claims-paying ability of the issuing insurance company. Please consider risks, charges and expenses carefully before engaging in a reverse mortgage. Borrowers must meet a minimum age requirement to qualify. The borrower is still required to pay taxes and insurance on the property. The amount of money available is based on the owner’s equity in the home. Medicaid and other need-based government assistance can be affected. As the loan balance gets larger over time, the value of the estate/inheritance may decrease over time.

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