Longevity Planning: Ensuring Your Money Lasts Throughout Retirement

In recent decades, the average lifespan has gradually increased for both men and women.

While a longer life expectancy means more time to spend with loved ones, it’s also reshaping how people approach retirement. Additional years in retirement require more savings—not to mention the increased probability of additional costs like medical emergencies or long-term care.

The possibility of outlasting your retirement savings is called longevity risk, and while it sounds scary, it’s also avoidable (with the proper preparation in place). By being proactive with longevity planning now, you can establish the safeguards necessary to combat those fears and better ensure your wealth lasts your entire retirement.

Below, we’re exploring the concept of longevity risk and providing the top considerations for preparing for a long, enjoyable, and financially secure retirement.

Understanding Longevity Risk

No one can tell for sure when their last day will be. And while we can rely on historical data to predict life expectancies, the truth is that many factors play into every individual’s life span. You’re unique with your risk factors, from genetics and family history to career choices, activity level, diet, location, and general lifestyle. Access to specific resources like quality healthcare, fresh foods, and clean air can also impact your lifespan.

Most retirement plans are based on a general timeline, say 15-20 years into retirement. A timeline is essential, as it can help you and your financial professional determine the appropriate amount to withdraw each year.

The 4% rule, for example, is a common starting point for determining withdrawal rates. It indicates that 4% is a safe annual withdrawal rate for retirees to ensure their portfolio lasts throughout retirement. As we’ve discussed, this rule assumes a 30-year retirement, which is not guaranteed. 

Longevity risk refers to the possibility that an individual will survive past their anticipated life expectancy. Not only can longevity risk impact a retiree’s financial security, but it’s also impacted insurance companies and pension plan providers in recent years.

These companies use complex formulas and historical data to calculate pension and insurance policy payments. Simply put, when people live longer than expected, these companies spend more on benefits. Longevity risk and an increasing number of Baby Boomers entering retirement (called the “silver tsunami”) have forced insurance companies and other providers to increase premiums or limit defined benefit plan offerings altogether.

Beyond living longer, there are a few additional factors that can increase longevity risk, including:

• Healthcare needs
• Inflation and cost of living
• Market volatility
• Lack of available defined benefit plans (or pension plans)

Financial Planning for Longevity

So the question now becomes, how do you prepare proactively for longevity concerns in your financial plan?

One of the most impactful things you can do to combat longevity risk is to start planning early with your long-term financial plan. Working with your advisor, determine what strategies can help you build long-lasting retirement income.

These may include:

• Preparing for future healthcare costs
• Evaluating your income sources
• Reviewing your investment strategies
• Remaining adaptable to changing circumstances

Let’s take a closer look at each.

Preparing for Future Healthcare Costs

Knowing you could be spending thousands (even hundreds of thousands) on healthcare expenses in retirement gives you a chance to prepare ahead of time. Namely, consider creating a separate medical emergency fund, ideally in a tax-advantaged account like an HSA or FSA (if available). The more you have set aside expressly for a hefty hospital bill or expensive prescription, the less you’ll have to pull from your other retirement savings or investments.

In addition, work with your advisor to make strategic, forward-focused decisions regarding Medicare coverage and supplemental insurance options. Finding the right balance between having appropriate coverage and spending a comfortable amount on monthly premiums and out-of-pocket expenses is essential. During the open enrollment period each year, you’ll have the opportunity to change your existing coverage, such as switching from original Medicare to a Medicare Advantage plan (or vice versa). 

Keep in mind, one area Medicare doesn’t cover is long-term care. But considering around 70% of today’s 65-year-olds will require long-term care at some point in the future, it’s a critical cost to consider.¹ Again, you and your advisor can discuss options such as obtaining a long-term care insurance policy or establishing a separate account for future care costs. 

Evaluating Your Income Sources

Your “paycheck” in retirement will come from various sources, including savings, investments, pension plan payments, Social Security, and more.

A diversified income stream can help you preserve more of your portfolio for longer, which is critical in creating long-lasting wealth and combatting longevity risk.

Social Security, in particular, may be a small—but still functional—component of your retirement income guaranteed to last your entire lifetime. The natural beauty of Social Security is that the longer you wait to begin collecting benefits, the greater your benefits will be (up until age 70). That’s because every month you wait to collect after your full retirement age, you’ll receive more delayed credits—up to 8% per year in additional credits.² 

During a long retirement, those additional dollars can certainly add up to tens of thousands of dollars in extra retirement income.

Reviewing Your Investment Strategies

Nearing retirement, your investment focus tends to shift. Your ability to take on risk diminishes as you become more reliant on your portfolio to serve as a steady source of income. During this stage, you and your advisor will want to find opportunities to accomplish goals such as:

• Preserving your current assets
• Exploring opportunities for income-producing investments
• Capturing enough growth to outpace inflation
• Balancing risk and return

Everyone’s tolerance for risk and investment goals are unique, so be sure to work directly with your advisor to develop and execute a tailored investment strategy that addresses your needs in retirement.

Remaining Adaptable to Changing Circumstances

While it’s critical to retire with a strategy for combatting longevity risk, you also need to remember that things are likely to change, and you’ll have to adapt.

Your circumstances, for example, may evolve in retirement and could impact your financial obligations. Say you get divorced, receive a medical diagnosis, or choose to start an encore career—there are many ways in which changes to your personal life can impact your retirement income needs.

On the flip side, changes to the economy or financial markets can also impact your financial landscape. A sudden market downturn, for example, may cause a temporary drop in your portfolio’s value. A rise in inflation and interest rates, as we saw post-Covid, can impact your retirement income too. Remaining adaptable and vigilant can help you address potential challenges as they arise. 

Let’s Make Sure Your Money Lasts in Retirement

Ultimately, nobody wants to feel worried about outlasting their savings in retirement. And if you’d like to leave a meaningful legacy for loved ones, you’ll also want to work with your advisor and attorney to accomplish those goals.

Whether retirement is quickly coming down the line or still several years away, you can take proactive steps and plan for a more financially secure and fulfilling retirement.

If you’d like to discuss your retirement planning challenges or questions with a trusted financial professional, don’t hesitate to contact our team today.

^Sources:

^{1Long-Term Care Statistics: A Portrait of Americans in Assisted Living, Nursing Homes, and Skilled Nursing Facilities}

^{2Early or Late Retirement?}