Longevity Risk

Longevity risk refers to the financial risk of living longer than expected, which can deplete savings and pose a threat to retirement security. For instance, if you retire at 65 and expect to live until 85, but end up living until 95, you face a potential shortfall in funds. Assuming you have $500,000 saved, and you withdraw $30,000 annually, you would exhaust your savings in about 16 years—well before reaching age 95.

Many people mistakenly believe that they will not live beyond their expected lifespan, often relying on average life expectancy statistics. However, advances in healthcare and lifestyle changes can lead to longer lifespans, increasing the likelihood of facing longevity risk. For example, if a couple at retirement age has a 50% chance that one partner will live to 95, they need to plan for that potential scenario.

To mitigate longevity risk, consider strategies such as increasing savings, investing in annuities, or delaying Social Security benefits to maximize monthly payouts. For example, deferring Social Security benefits until age 70 can increase your monthly benefit by up to 76% compared to claiming at 62. This approach can provide a more stable income stream later in retirement, helping to bridge the gap if you live longer than anticipated.

Key takeaway: Assess your retirement plans with a focus on longevity risk to ensure your savings last throughout your life. Regularly review your financial strategy to adjust for changing life expectancy and personal circumstances.