How to Protect Your Retirement From Longevity Risk

Retirement can be a long phase in your life, depending on when you retire and how long you live. The average retirement age was 65 for men and 62 for women in the country as of 2021. The average life expectancy, on the other hand, is 79.05 years. Having said that, the U.S. also has the highest number of centenarians, estimated to be around 97,000. According to the Social Security Administration (SSA), a person retiring at the age of 65 must plan to live for at least 19 to 21.5 years. SSA also found that a third of 65-year-olds can live up to the age of 90. Further, one in seven 65-year-olds is likely to live beyond the age of 95 years.

While it is impossible to predict the future, it is essential to plan for the unexpected. Your retirement can last an average of 20 to 25 years or longer, depending on a number of factors, such as your health, retirement age, medical advancement in the future, and more. Some of these factors are out of your control. Therefore, you must account for the unforeseen and save enough money for your future. Running out of money in retirement can be detrimental to your mental and physical well-being. It can force you to depend on others for your needs. It can also cause you to live below your means. Thankfully, proper retirement planning can help. You can also reach out to a professional financial advisor who can guide you on what steps to take to protect your retirement savings and make them last your retirement years.

Here are some things to understand about longevity risk and retirement income planning to make sure you never outlive your savings. 

What is longevity risk in retirement, and why is it important?

Longevity risk refers to living beyond life expectancy rates. For instance, if you outlive the current average life expectancy of 79.05 years, you risk running out of your retirement funds. Everyone wants a long life. In fact, scientists are trying day in and day out to find measures to extend human life. However, living beyond a certain age can be problematic if you do not save enough.

Longevity risk and retirement savings should ideally be balanced on the equilibrium. If you have adequate savings, you can live a long and financially secure life. However, in most cases, people lack the hindsight or tact to save for so many years of retirement. Under these circumstances, retirees risk outliving their savings funds.

Longevity risk can be problematic in more ways than one. Firstly, your health expenses can increase when you live longer. Older people tend to have more health issues and therefore require better health insurance schemes and long-term care. This quickly translates to higher insurance premiums or out-of-pocket expenses. Either way, you end up spending more money than you planned. Longevity risk is also concerning for insurance companies. If customers live longer, the insurance company is liable to pay more money for pension plans. This can create problems in cash flow and ultimately lead to solvency issues.

How to protect your retirement savings from longevity risk

Here are some things you can do to ensure you have an adequate retirement corpus:

1. Start planning early:

Starting young can be one of the smartest and simplest ways to lower longevity risk. A longer investment horizon helps you override market volatility leading to better gains in the end. It also offers benefits like the power of compounding to help you earn more. Ace investors like Warren Buffett have also used a long-term investment approach or the buy and hold strategy. A longer-term eliminates emotional decisions, untimely exits, and lost opportunities. Your money grows at a steady pace and allows you to be financially independent in the long run.  

2. Be realistic about your retirement:

Your financial needs in retirement will depend on the duration of your retirement, the age you retire at, the number of people in your family who are financially dependent on you, your health, the state you reside in, your tax liabilities, and other similar factors. Being realistic about these needs and possible expenditures is critical to ensure a financially safe retirement. If you retire in your 60s and live until 80, you would have to plan for approximately 20 years of retirement. However, if you retire early, say in your 40s, as many people who believe in the FIRE (Financial Independence Retire Early), and live till your 80s, you would have to save for 40 odd years.

While you may not be able to predict your life expectancy accurately, you can look at your family tree and plan accordingly. If your parents and grandparents live a long and healthy life, you may too. You can also pay attention to your health issues. If your health is worsening in your 50s or 60s, it is likely to deteriorate more. In this case, your health expenses may rise, and you would require more money. If you are retiring earlier than the average age of 62 and 65, you need to be more aggressive in your savings.

Therefore, it is essential to be realistic and as accurate as possible with your retirement planning to avoid outliving your money. Pay attention to your health. If you want to retire early, make sure you understand the pros and cons well. Additionally, you can also use retirement calculators to check if your savings are on track with your needs. These can be found online and can help you plan your future.

3. Consult with a financial advisor:

A financial advisor can help you understand longevity risk and retirement income planning better and effectively plan for the future. Financial advisors are professionals skilled in investment planning, estate planning, tax planning, and more. They can help you create a solid portfolio that stands the test of time. They can also help you create a budget to keep your expenses in check post-retirement so you do not risk running out of funds. Moreover, a financial advisor can calculate the ideal withdrawal rate for your retirement savings, so you are not left without money in your lifetime. 

It may also be necessary to make adjustments to your portfolio as you move closer to retirement and even after you retire. The market is dynamic, and inflation is ever-rising. So, you would have to rebalance your portfolio from time to time, liquidate some assets, and buy other investments. A financial advisor can help you with all of these tasks and more. Further, they can help you lower taxes in retirement, which will ultimately protect your retirement savings. 



Need a financial advisor? Compare vetted advisors matched to your specific requirements.

Choosing the right financial advisor is daunting, especially when there are thousands of financial advisors near you. We make it easy by matching you to vetted advisors that meet your unique needs. Matched advisors are all registered with FINRA/SEC.
Click to compare vetted advisors now.


4. Delay Social Security benefits:

Social Security benefits can be further enhanced if you delay claiming your check. Typically, you can start withdrawing your money from the normal retirement age, which is 66 for those born before the year 1960 and 67 for those born in the year 1960 or later. However, delaying it by a few years can increase the value of your check and secure you for a longer time in retirement. If you claim it at the age of 70, you increase your check by 32%. Every year you delay claiming, your check gives you an extra 8% monthly. This is a lot higher than the cost of living adjustments (COLAs) for Social Security benefits, which are averaging around 1.5% per year.

If you have enough money to last you the initial years of retirement, you can easily delay claiming Social Security benefits till the age of 70. This way, if you live past the average life expectancy, you can use your Social Security benefits check to combat the longevity risk.   

5. Withdraw your funds systematically:

Planning the withdrawal of your funds is critical if you want to know how to protect your retirementYour withdrawal rate has to be steady and in line with inflation, your changing needs, the total amount of your savings, etc. A lot of people get misled by the high figures in your retirement funds. It is essential to understand that this money is supposed to last you a number of years. During these years, you would likely have no source of income other than your investment returns and savings. Additionally, you may also have increasing health expenses, unplanned financial emergencies, etc. Above all, your retirement fund will diminish with inflation. Therefore, do not make the mistake of withdrawing a big chunk of your savings in the initial years of retirement. This can leave you financially unprotected later.

One of the most used strategies for this is the 4% rule. The 4% rule states that you can withdraw 4% of your total retirement savings in the first year of your retirement. Post this, you can adjust the inflation rate in your withdrawals and accordingly draw your money each year to ensure you have enough to counter the rising prices. You do not necessarily have to follow the 4% rule. You can devise any strategy of your choice. However, make sure that you follow a steady pace that ensures a balanced withdrawal rate for your retirement, irrespective of how long you live or when you retire. Ideally, a lower withdrawal rate in the initial years can make your retirement fund last longer.

6. Invest in guaranteed annuity plans:

Guaranteed annuity plans are exactly as they sound. They offer assured payouts in retirement to ensure financial liquidity for life. Annuity plans are low-risk options. They are not market-linked and therefore provide guaranteed income for life. There is no fluctuation or chance of losing your money. You can select payouts according to your needs and live a stress-free life. There are two types of annuity plans –immediate and deferred. Immediate annuity plans offer instant payout right after making a lump sum premium payment. Deferred annuity plans provide the option to take payouts in the future on a set date. However, make sure to compare the interest rates of different annuity plans before you invest your money. Annuity plans fix the interest rate at the beginning of the policy term, and it remains the same for the entire duration. So, pick a high-interest rate to beat inflation.

7. Maintain a diversified investment portfolio:

Your financial security will depend on your choice of investments. If you have a diversified portfolio, you can lower risk and consequently save more money. This, in turn, will last you a long time and therefore reduce longevity riskYou can invest in high-risk, high-profit generating investments, such as stock, equity mutual funds, exchange-traded funds, real estate, and more, to ensure you have high returns that beat inflation. Simultaneously, investing in relatively low-risk options is crucial to balance the risk. These can include bonds, certificates of deposits, government securities, and others. It is also essential to invest in tax-advantaged accounts like the 401k retirement account and the Individual Retirement Account (IRA). These can offer tax-deferred growth, so you are not taxed in retirement. This way, the tax will not further affect your existing retirement corpus. These accounts also follow a long-term investment approach and are great for establishing financial discipline. If you struggle to save money, you can consider investing in a 401k or an IRA.

Additionally, you can also invest in other goal-specific tax-advantaged accounts, like the Health Savings Account (HSA) or the 529 education savings account. The former offers tax-deferred growth, and the withdrawals are tax-free if the money is used for qualified health expenses. The latter lets you save for a child’s higher education. A 529 account also offers tax advantages, including tax-free qualified withdrawals. This helps you cater to multiple other financial goals so you do not overlap your retirement savings with different needs. Further, since they are exempt from tax, you decrease your liabilities.

To conclude

Longevity risk in retirement is more common than you think. A lot of retirees struggle to make ends meet. Sometimes it can be because of a lack of planning. Other times, it can be due to factors out of their control. However, sound retirement planning can help you live a secure retired life without any financial concerns. Make sure to start saving from a young age and be consistent throughout.

It is also important to avoid overspending in retirement and be cautious about your spending habits. And if you still need help in protecting your retirement financially, you can always consult a financial advisor near you and create a suitable plan. Use Paladin Registry’s free advisor match tool and get matched with 1-3 qualified advisors who may be able to help you with your unique financial goals and requirements.

Other posts from Paladin Editorial

Leave a Reply

Your email address will not be published. Required fields are marked *