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Longevity Risk: What It Is and How to Manage It

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With life expectancies increasing, an average, healthy 65-year-old couple retiring in 2021 can expect to reach 87 (male) and 89 (female)¹. Longer lifespans mean more time to enjoy life after leaving the workforce. But they also mean that retirees must fund more years of living expenses. Otherwise, they risk outliving their money. That’s called longevity risk.

Longevity risk is a common worry for retirees and pre-retirees today. In fact, in American Century’s 2021 9th Annual Survey of Retirement Plan Participants, 42% of retirement plan participants between ages 27-56 said they were most concerned about the possibility of outliving their money, while over a third of those ages 57-75 cited the same concern as their biggest worry.

How to Manage Longevity Risk

It’s perfectly reasonable to be concerned about longevity risk. Fortunately, you can reduce this risk through careful planning. Here are a few tips that may help.

Estimate how long your money needs to last.

Having a realistic understanding of how long your retirement may continue can help you plan accordingly. You can’t predict your life expectancy with 100% accuracy, but tools like the Actuaries Longevity Illustrator may help you forecast how long you might live based on your age, health and gender.

For instance, if you retire at age 65, you may need to plan for 30 to 35 years of retirement. Continuing to work after age 65 or taking a part-time job as you transition out of full-time work could help you stretch your money a little longer.

Making Your Money Last?

More than half of workers surveyed by the Transamerica Center for Retirement Studies in its 2020 retirement survey expected to retire after age 65 or do not plan to retire at all. For some people, it’s easier to stay in the workforce for a few more years versus re-entering the workforce late in retirement if there’s a shortfall.

Take Social Security strategically.

For many retirees, Social Security is a key income stream in retirement. Before you start taking it, run a few different scenarios to see how your benefits would change based on when you collect.

You may be eligible to receive benefits starting at age 62. But waiting until full retirement age (which varies depending on when you were born) or until age 70 could mean that you get a higher monthly benefit. This is one factor as you also consider how long you think your money needs to last.

Married couples may want to consider their Social Security strategy together. Each spouse’s earnings and anticipated life expectancy helps determine how and when it makes sense to take this benefit.

Retirement Income

Get tips on how to turn retirement investments into income.

Maintain an adequate amount of stock investments.

Stocks can potentially help your investments continue to grow. However, this possible reward does come with additional risk. Rather than investing completely in stocks, you want to balance that risk with other asset classes such as bonds and money market funds. Working out this balance is called asset allocation.

Pick a sustainable withdrawal rate.

Your withdrawal rate is how much you take from your retirement accounts each year to fund living expenses. Too high a withdrawal rate can deplete your investments sooner rather than later.

For example, if you withdrew 10% each year, your money might last only eight years. That’s too short a time horizon for most people retiring now. However, if you reduced your withdrawal rate to 4%, your money could last 29 years. That’s why a withdrawal rate between 3% and 5% is generally recommended, depending on your situation.

Lower Withdrawal Rates Could Make Your Money Last Longer

(Hypothetical Examples)

How Lower Withdrawal Rates Could Make Your Money Last Longer

These hypothetical situations contain assumptions that are intended for illustrative purposes only and are not representative of the performance of any security. There is no assurance similar results can be achieved, and this information should not be relied upon as a specific recommendation to buy or sell securities. Assumes a portfolio with 50% equity, 45% bond, 5% cash equivalents over 30 years at a 90% confidence level, with the following average monthly capital market returns: Stocks 7.90%, 18.90% standard deviation; Bonds: 5.00%, 4.95% standard deviation; Cash Equivalents: 2.25%, 1.00% standard deviation. The correlation between Stock and Bond returns is 0.2. Inflation rate is assumed to be 2% annually and is included in each of the withdrawal rates depicted above.

Standard deviation defines how widely returns vary from the average over a period of time.

Source: American Century Investments, 2021.

Adjust over time.

Once your plan is in place, sticking to it and taking a long-term view of your retirement investments is generally recommended. But it’s a good idea to review the plan from time to time. In addition to market volatility, your time horizons and your risk tolerance can change, too.

Our investment professionals advise revisiting your plan at least annually. Additionally, it’s wise to review it when you experience a major life event such as retirement, marriage or divorce.

Having a plan gives you a better chance of managing longevity risk and an opportunity to shape your own retirement reality.

Need help determining how to combat longevity risk?

We can help.


HealthView Insights: 2021 Retirement Healthcare Costs Data Report, HealthView Services, 2021.

This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.

Diversification does not assure a profit nor does it protect against loss of principal.