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Are You Prepared For Living Longer?

Are You Prepared For Living Longer?

August 08, 2023

“People who want to live longer may not have counted the costs of doing so. There’s a lot to consider if you want to live long and be well.” Jerry Yu

The idea of living longer appeals to many of us, especially as we begin thinking about retirement. Still, as enticing as it is to want to beat the odds, you might underestimate how much money you will need to maintain your lifestyle when you no longer work.

Longevity risk is when a person lives to such an advanced age that they deplete their retirement savings. When life savings are gone, you must rely on Social Security and Medicare alone, a frightening scenario for most seniors.

Research from The Centers for Disease Control (CDC) indicates that out of every 100,000 Americans born alive, more than 42% were still alive at age 85, and a surprising 25% reached age 90. Over 9% of us will make it to age 95!  You can see then that fears of outliving ones’ money have a strong basis in reality.

If you are someone concerned about potentially running out of money before you die, then you need to consult your retirement and income planner and devise a longevity strategy. One type of longevity blueprint is the “Spend Safely in Retirement” strategy, developed by researchers at the Stanford Center on Longevity.

This concept has several components, including waiting as long as possible to start taking Social Security payments. Until the age of 70, you will get more significant Social Security checks the longer you wait. In addition to taking Social Security payments later, Spend Safely in Retirement calls for more aggressive investment than most advisors recommend while withdrawing as little as possible. Using this system, you would set your annual withdrawal amounts using the IRS’ required minimum distribution (RMD) rules. Many seniors balk at Spend Safely in Retirement because they know that investing in equities increases their market risk. Also, your RMD can fluctuate since RMDs are calculated based on the year-end value of your accounts.

Could a longevity annuity help lessen the risk?

Another way to plan for individual longevity risk is risk-sharing or risk pooling through the use of a “longevity annuity,” also known as a “deferred income annuity,” or DIA. In risk pooling, people who live longer than expected receive income from the unused premiums of those who died earlier than expected. Un-used premiums create what are called “mortality credits.” Mortality credits are a benefit of income annuities that protect against longevity.

Longevity annuities are one of the numerous kinds of annuities available from insurance companies. In contrast to an immediate annuity, which begins payments within one year, longevity annuities don’t pay out until anywhere from 2-40 years after payment of the premium. Longevity annuities, then, are a kind of pension you can purchase for yourself using pre- or post-tax money.

Summing it up: Annuities, especially longevity annuities, can play a crucial role in helping retirees and pre-retirees protect against outliving their nest eggs. They are more customizable and flexible than ever and form an essential part of modern portfolio design. Before selecting an annuity, you should always consult a retirement and income specialist who can help you discover the right annuity to fit your risk tolerance and financial goals.