Retirement Income Planning Risks – Longevity Risk
We spend our working years saving, planning, and dreaming of the days of relaxation ahead of us in retirement. Retirement dreaming is a favorite pastime for people…
“When I retire I’ll buy a boat…”
“When I retire I’ll move somewhere warm…”
“When I retire I’ll finally take that cruise…”
Dreams keep us going, but dreams may also be the reason retirement income planning is a difficult subject for people.
Proper planning is not hard and is not time-consuming, but it requires us to get realistic, to take off the rose colored glasses for a moment and confront reality.
You have to be OK asking a few tough questions.
“Is there enough money to buy that boat?”
“Can you afford to move somewhere warm?”
“Do you really like cruise ships anyway?”
One of the least comfortable topics to confront is longevity risk.
We all want to live a long and healthy life with many years of retirement, but longevity is one of those things that makes people squirm when you talk about it in the context of retirement income planning.
How to Mitigate Longevity Risk in Retirement Planning
Longevity risk is the risk of outliving your income. Of course, living a long life is a great thing, but living your last few years without any income is a disaster.
And timing the draw-down of your assets so you bounce your last check is impossible.
It takes either substantial assets that exceed your spending needs or a sacrifice to your lifestyle to deliberately not spend what you have in order to manage the risk of outliving your income.
Or, you could do what people have done for centuries when managing risks of all types…
You can BUY INSURANCE!
An annuity is an insurance for your money, and the simplest form of annuities- immediate annuities– do nothing more than turn assets into an income that you can’t outlive.
It’s the simplest and one of the most efficient products out there. In fact, annuitization- turning assets into income with an annuity product- is mathematically proven to be the most efficient way of utilizing assets.
“Income annuities generate more income per dollar of capital invested than any other income-generating asset class, are non-correlated with equity and bond markets, and perfectly hedge longevity risk- a powerful combination of features to address a significant set of challenges.”
–Source: Financial Research Corporation Whitepaper
When considering longevity, here are a few actuarial facts to consider
The Average Life Expectancy is
- 85 Years For A 65-Year-Old Male
- 88 Years For a 65-Year-Old Female
- 50% chance one of a 65-year-old couple to reach 92 Years!
The Problem Is … This is the Average
- 50% Live LONGER Than Average…
Bottom Line- Most Married Couples Should Plan For One of The Two To Live Well Into Their 90’s!
Longevity – The Risk Multiplier
Most market-based advisors are aware of longevity risk, but their solution is usually a measured withdrawal strategy from a portfolio of market-based securities. It’s not exactly a bad strategy, but it is not foolproof, and it’s not right for everyone. When using measures to systematic withdrawal strategy, other factors and risks like volatility and sequence of returns all impact the stability of your portfolio, and bad years can be a disaster you may never recover from.
But of all the risks to be aware of in retirement income planning, longevity is really the risk multiplier that compounds and enhances other risks. You might have plenty of money for a 10-year retirement, but what if they last for 30 years? What are you going to do?
And even if you have enough now, does your portfolio have time to recover from a bad year? What about 3 bad years?
And what’s the effect on your portfolio if you rely on it for income, AND have 3 bad years in a row?
The risk of a bad sequence of returns in your portfolio combined with longevity risk should make the case for annuities loud and clear.
Do you face longevity risk in your retirement income planning?
As mentioned earlier, there are several ways to confront longevity as a risk.
One way is a thorough assessment of your assets. If you have significant assets and are spending just 1-2% of your total assets per year, it would take severe mismanagement and market devastation to risk running out.
Even for those with significant assets, the stability and safety of guaranteed income is appealing. Period certain guaranteed payments like secondary market annuities make a great allocation for those who seek to add safety and the stability of a guaranteed income, but who may not need a guaranteed LIFETIME income.
But chances are good that if you’ve read this far, surplus assets and a minuscule expense ratio are not problems you face, and that longevity is, in fact, a risk to consider.
So on to the next way to mitigate longevity risk, and that is through a rational examination of your health. If you have health or family history reasons to expect a lower life expectancy, you may not need to plan for a life expectancy onto the 90’s.
As I said at the start, talking about longevity risk is not for the squeamish. But again, period certain guaranteed annuities like secondary market annuities make a great allocation for those who seek safety and the stability of a guaranteed income, but who may not need a guaranteed LIFETIME income.
The Case for Guaranteed Lifetime Income
At this point, if you’re at all concerned about the ratio of your assets to your income needs and your retirement timeline, and have even an inkling of doubt if there’s enough to go the distance, then you owe it to yourself to at least investigate an annuity.
And frankly, the best and cheapest way to offload that longevity risk is to acquire an annuity as a source of guaranteed lifetime income.
This is the starting line- if you think you need a lifetime income stream, and want to mitigate longevity risk, there are a host of choices from this point forward. Give us a call to get started on your own optimal plan.