When managing longevity risk, it pays to listen to our elders. The late Charlie Munger, who died at age 99, was known not just for his market-beating investments but also for his wise musings. His favorite saying was, “All I want to know is where I'm going to die, so I'll never go there.”
Ironically, much of retirement planning revolves around trying to give yourself that level of control and assurance — especially when it comes to the uncertainties of a long life. Living a long, happy life is the ultimate goal, but with it comes the challenge of ensuring your finances can go the distance.
Longevity risk and fear
One of the greatest unknowns is not just where we’ll meet our end, but when. This uncertainty is known as longevity risk, the risk of living longer than expected and running out of money. It’s a fear that haunts many retirees, often ranking higher in surveys than the fear of death itself.
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Despite a slight dip due to COVID-19, people are generally living longer, with retirees facing the prospect of many years post-retirement. Average life expectancy has increased from 68 years in 1950 to 77.5 years today. The Society of Actuaries estimates that a couple both reaching age 65 has a 50% chance that one spouse will live to 93.
There are countless personal factors influencing life expectancy, some within our control and others not. Thankfully, there are steps you can take to help your money last as long as you do — no matter when or where your journey ends.
Estimate Your Lifespan and Retirement Income Needs
A good place to start is by determining how vulnerable you may be to longevity risk.
While predicting your lifespan isn’t an exact science, assessing your health and family medical history can provide a reasonable estimate. Online life expectancy calculators can offer more personalized projections, guiding your financial planning for those later years. For a simple calculator, try using the Social Security life expectancy calculator. For a more comprehensive estimate, try the Blue Zones True Vitality Test.
Once you have an estimate, consider how much income you’ll need in retirement. A common rule of thumb is 80% of your pre-retirement income, though this varies. You may need more or less, depending on your lifestyle and health. If a long life seems likely, saving a little more won’t kill you. This estimate can also help you calculate how much you will need to save for retirement.
Finally, if you want to retire early, or even at 50 or 55, your longevity risk will increase, so plan accordingly.
Maximize your Social Security benefit
Social Security is a key income source for most retirees. In fact, half of married couples and over 70% of unmarried individuals rely on it for at least half of their retirement income, according to the Social Security Administration.
So, it helps to strategize on getting the most out of it.
“In many cases, this is as simple as delaying your Social Security benefit,” says independent financial planner Aaron Brask. Delaying from age 62 to 70 can boost your payout by up to 8% per year, resulting in a benefit that’s 76-77% higher at age 70. In other words, when deciding when to start Social Security benefits, your age matters.
There are also other strategies, especially for married couples, to boost your benefit beyond just delaying. For instance, a strategy known as the “62/70 split.” Here, the lower-earning spouse starts benefits at age 62, while the higher-earning spouse delays until 70. This allows the higher earner to receive a spousal benefit while waiting, ultimately increasing both their own benefit and the survivor benefits for the surviving spouse.
When it comes to longevity risk, “The idea,” Brask says, “is to maximize the level of guaranteed lifetime income.”
Consider adding an annuity to your portfolio
Annuities can provide another steady stream of guaranteed income. However, they range from simple, low-cost options that generally deliver on their promises to complex, expensive products often criticized for benefiting advisors more than clients.
While annuities “often get a bad rap,” Robert Johnson, PhD, CFA, CAIA, and Professor of Finance at Creighton University, suggests considering them. “Having an annuity cover your basic living expenses is a terrific cornerstone to a retirement income plan,” he says.
Research from Morningstar indicates that a partial allocation to an income annuity can improve retirement outcomes when used as a bond substitute. A common option is a deferred income annuity, also known as a longevity annuity, where you pay a premium today in exchange for guaranteed income starting at a future date.
“If you have a longevity annuity, you have a secure source of income late in your life at a reasonable cost,” Johnson says.
Still, annuities aren’t for everyone. They come with potential drawbacks, such as a lack of inflation adjustments (unless you purchase an inflation rider) and hefty surrender charges if you need to access your funds early.
As Johnson notes, “The varieties of annuities and their specific terms are wide. Investors should avail themselves of the services of a financial professional to analyze annuity choices.”
Follow the bucket strategy
What about the portion of your savings that isn’t guaranteed?
One effective strategy finance experts recommend is the bucket approach, which helps cover your immediate needs while preserving your portfolio’s long-term sustainability.
The bucket approach divides your retirement portfolio into three categories: cash, bonds and stocks. Each “bucket” serves a specific purpose: cash for immediate income and capital preservation, bonds for intermediate cash flow needs and stocks for long-term growth.
By allocating your assets this way, you can manage your short-term needs while still positioning your portfolio for future growth.
Set a flexible withdrawal rate
Longevity risk amplifies every other risk in retirement, most notably by increasing your exposure to market fluctuations over time. The lifespan of your portfolio hinges on your withdrawal rate, which can become particularly consequential during market downturns.
The 4% rule is a common starting point, advising you to save 25 to 30 times your annual spending and withdraw 4% annually, adjusted for inflation. But a dynamic withdrawal rate offers more flexibility. By adjusting your withdrawals based on market conditions — taking more in good years and less in bad — you can help your portfolio recover from downturns and extend its longevity.
Make a plan for long-term care
In retirement, everything is interconnected, including your health and finances. As you age, changes in your body can significantly impact your savings. With a 70% chance of needing long-term care after age 65, everyone should plan ahead.
Long-term care is expensive, and Medicare doesn’t generally cover it. Relying on personal savings or family support can be challenging when the national median cost for a semi-private nursing home room is $8,669 per month, according to the Genworth Cost of Care Survey. While Medicaid is an option, it requires you to deplete most of your assets, and the coverage may fall short of your needs.
An alternative is long-term care insurance or a hybrid life insurance policy. Traditional plans offer benefits for yearly premiums, but these can increase, and unused benefits leave nothing for heirs. Hybrid policies provide a growing pool of benefits without premium hikes and may include a death benefit if care isn’t needed. Some life insurance policies also allow you to use a portion of the death benefit for care, offering a “living benefit” while still leaving something for beneficiaries.
The best choice depends on personal factors like your family health history, current health, age and wealth.
Take advantage of HSAs
To combat longevity and healthcare challenges, consider contributing to a health savings account (HSA). HSAs offer a triple tax benefit: contributions are tax-free, the money grows tax-free and withdrawals for medical expenses are tax-free. Additionally, there are no required minimum distributions (RMDs) in retirement, and after age 65, HSA funds can be used for nonmedical expenses without penalty.
Consider part-term work or a phased retirement
Counterintuitively, one way to manage longevity risk and ensure a comfortable retirement may be to keep one foot in the workplace, if possible.
Part-time work, consulting or a phased retirement can provide additional income and help ease the transition into full retirement, allowing time to adjust your plan if needed. There are tax and other financial implications, so be sure you understand how working in retirement could affect you, both positively and negatively.
While not the majority, many retirees aren’t quitting work entirely. According to T. Rowe Price’s recent Retirement Saving & Spending Study, about 20% of retirees are working part-time or full-time, and 7% are looking for work. Financial necessity drives this for nearly half (48%) of those working, but 45% do so for social and emotional benefits.
This is supported by research that shows working later in life can also contribute to a healthier, happier retirement by providing a sense of purpose and connection.
After all, if you’re going to live a long life, it’s worth doing what you can to be able to physically and mentally enjoy it.
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