Longevity Risk

Longer Life, Bigger Risk

When we think about retirement, we often imagine doing things we love, like traveling, pursuing hobbies, volunteering, or spending time with family. But one big challenge is making our money last as long as needed. After all, the goal of retirement is to enjoy it the way we want. To figure that out, we must answer a simple question: How long does our money need to last?  

Plan for Longer Retirement

In the 1950s, the average retirement for men who were 65 years old lasted about eight years. However, things have changed a lot since then. One significant change is that people now live longer, which means a longer retirement.  

Let’s look at Bob and Amy as an example. Bob is 65, and his life expectancy is 89. So, if he retires now, he needs to make his money last for about 24 more years. Amy’s life expectancy is 90, which means she may have 25 years of retirement. However, life expectancy is just an average. Some people will live longer, while others will live shorter lives.  

To help understand this better, imagine 100 men in one room and 100 women in another. Half of them will live beyond the average life expectancy, and the other half will live for a shorter time. For example, out of 100 men, around 25 can expect to live until they’re 94, and 5 may even reach 100. For women, about 25 out of 100 can expect to live until they’re 96, and 5 may get 102. Living longer than expected is a real risk in retirement. We call it longevity risk, which makes other retirement risks more significant. It’s like a risk multiplier.  

Consider Inflation Risk

Let’s consider another risk: inflation, the price increase over time. If inflation remains at a constant 3% during retirement, the cost of groceries, for example, will more than double for Bob. If he spends $100 on groceries today, when he reaches his life expectancy, it will cost him $222.13. By age 94, his grocery bill would be $257.51, two and a half times what it was when he retired. If Bob’s income doesn’t increase in retirement, he may have to find ways to cut his grocery spending.  

Longevity risk makes the impact of inflation risk even more significant, making retirement more challenging for Bob. The good news is that there are financial strategies you can use to help reduce longevity risk.  

Speak with a financial professional about using different insurance products and economic systems that may suit you to help guide you in planning for a longer retirement and managing the associated risks.  

Watch the video above for more information.

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