Will you outlive your retirement savings? That’s the big question posed by longevity risk. Here’s what you need to know about this risk and how it could affect you financially.
For retirees, there is a real risk that you will live longer than expected and deplete the funds you’ve saved. Not only is it impossible to project how long you’ll live (more than half of Americans in a Society of Actuaries study underestimated this), it’s also difficult to gauge just how long your savings will last.
Part of this has to do with increasing life expectancy in the United States, so much so that many people live more years after retirement than when they were working. While living longer is a good thing in many ways, it’s been found that people who underestimate their life expectancy are at greater risk of outliving their financial assets and experiencing financial stress during those retirement years.
How to Manage Longevity Risk
Taking care to manage funds so that they last as long as you expect to live is a tricky balancing act. On the one hand, if you are overly conservative you may needlessly restrict your lifestyle when you’re in the early years of retirement (and the most mobile and healthy). On the other hand, if you overspend, your savings may not endure your life span.
Discuss this risk with your wealth advisor.
Although they aren’t able to predict how long you’ll live, they are equipped to know how to help you manage your funds in light of all kinds of risks, including this one. Your wealth advisor will be there to guide you through managing longevity risk during your retirement planning phase, well before you reach retirement age, and during your retirement.
Consider other sources of retirement income.
There are several options for providing you with a steady stream of income during your retirement years. Here are some examples of a few (note that the right income sources for someone else may not be the right ones for you; we aren’t recommending any particular option).
An annuity can mitigate some of this risk by providing one income source for life. There are certain disadvantages and, as with all financial decisions, you need to proceed with research and caution, but your wealth advisor is there to help you understand if this would be a good choice for you.
Risk Sharing in Annuities
Also called risk pooling, this straightforward strategy involves receiving income from mortality credits, which are unused premiums that were contributed by those who did not meet their full life expectancy. Those funds go into an annuities pool that are used to pay lifetime income to those invested in the pool. These credits increase with age and so hedge longevity risk.
Bond laddering is another popular way to provide income. It involves purchasing assorted bonds of different maturities, and staggering the maturities over time. As each bond matures, it is reinvested in another three-year bond to retain the staggered bond ladder.
Do you want to ensure longevity risk and other risks are taken into account during your retirement planning? Let Ironwood Wealth Management help. Our personalized approach to comprehensive retirement planning will bring you peace of mind. Schedule some time for an introductory chat today.