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.