Longevity Risk

(2 of 7)

Longevity Risk

Longevity risk is the risk of negative financial consequences as a result of living longer than expected. Advances in medicine mean that many of us can expect to live—and pay for—20, 30 or more years beyond the traditional retirement age of 65.

Why it matters

Longevity risk is of particular concern to women. They tend to live a few years longer than men, and the death of a spouse or partner can mean a decrease in income. As traditional pension plans disappear and more of us become more responsible for funding our own retirement, it will be more important than ever to take longevity risk into account in our retirement planning.

Longevity risks include:

• Incurring burdensome medical bills
• Losing purchasing power to inflation
• Having to fund long-term care
• Generally, just having to lower your standard of living to avoid running out of money

Life expectancy

Retirement planning, even when done by professionals, often uses one’s "life expectancy" when planning for their future. But life expectancy is simply a statistical average. There is a significant chance you will live much longer than average and face one or more longevity risks.

It is therefore essential to recognize how longevity risk may affect you and to have a plan for managing it. Working with a financial planner who also recognizes and shares this concern is a good start.

What can you do?

Here are a few ideas to consider and discuss with your planner:

• Convert some of your assets into an annuity from a sound life insurance company to ensure a lifetime income stream, keeping in mind the risks. Learn more about the risks of an annuity.
• Before the situation becomes critical, develop a budget by which you will reduce your estimated future expenses without a drastic change in lifestyle
• Consider some sort of part-time work during retirement and/or postpone your target retirement date
• Convert some or all of the equity in your home into current income through a reverse mortgage, which does not have to be paid back until you no longer live in the house. Make sure you understand the risks of reverse mortgages.