We all understand the importance of creating a retirement plan and saving to ensure that we will have enough to live on once we stop working. But how can you accurately plan when you don't know how long you will live? How can you make sure that your retirement savings will not run out?
Longevity Risk
Longevity risk is simply the risk of living longer than expected. The average life expectancy for males is 84, and for females, 86. But one in four will live past the age of 90 and one in 10 will live past 95. Based on these numbers, your retirement could easily last 30 years instead of 20. Those 10 years could make or break you financially, so it is crucial that you plan for longevity risk and make necessary adjustments.
As we all know, there's no way to predict how long you will live, and this makes planning complicated. Retirees need to secure an adequate stream of income for an unpredictable length of time. If you plan to live to age 82, and it turns out you live to 92 how are you going to make your money last the additional 10 years?
How to Plan for the Unknown
Wise planning starts with a realistic expectation of life expectancy using life expectancy tables, as well as considering personal and family health history. Because it would be much worse to outlive your money than the other way around, it's also essential to factor in five-10 extra years to your number so that you will be covered through to the end of your life. This also adds a hedge for unexpected medical expenses, long-term care, and inflation.
The longer the planning horizon, the more resources will be required for retirement. The most obvious way of lowering the risk of outliving your money can be accomplished by saving more before you retire.
There are also a variety of investment strategies and products that can provide you with a steady stream of income through your retirement years, such as annuities. Delaying Social Security claims, as well as finding creative ways to earn income longer can also add years to your retirement savings.
Don't let the unexpected nature of life expectancy worry you. Make the time to speak with a qualified financial advisor to create a retirement plan that will provide for you throughout your retirement, regardless of how long that lasts.
Does your current retirement plan factor in your longevity risk?
This article was originally published on RichLifeAdvisors.com
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