Longevity Risk

Longevity risk is the possibility of outliving your retirement savings. People often underestimate how long they will live. Mitigate this risk by considering your life expectancy alongside careful financial planning.

Terry Turner, writer and researcher for RetireGuide
  • Written by
    Terry Turner

    Terry Turner

    Senior Financial Writer and Financial Wellness Facilitator

    Terry Turner has more than 35 years of journalism experience, including covering benefits, spending and congressional action on federal programs such as Social Security and Medicare. He is a Certified Financial Wellness Facilitator through the National Wellness Institute and the Foundation for Financial Wellness and a member of the Association for Financial Counseling & Planning Education (AFCPE®).

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    Lamia Chowdhury
    Lamia Chowdhury, editor for RetireGuide.com

    Lamia Chowdhury

    Financial Editor

    Lamia Chowdhury is a financial content editor for RetireGuide and has over three years of marketing experience in the finance industry. She has written copy for both digital and print pieces ranging from blogs, radio scripts and search ads to billboards, brochures, mailers and more.

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    Stephen Kates, CFP®

    Stephen Kates, CFP®

    Principal Financial Analyst for RetireGuide.com

    Stephen Kates is a Certified Financial Planner™ professional and personal finance expert with over a decade of experience working with individuals and families who need help with their finances. With experience as a financial advisor for two of the largest financial firms in the country, Stephen has worked with hundreds of clients to build comprehensive financial plans to grow and protect their wealth.

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  • Published: August 10, 2022
  • Updated: October 30, 2023
  • 5 min read time
  • This page features 9 Cited Research Articles
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How to Cite RetireGuide.com's Article

APA Turner, T. (2023, October 30). Longevity Risk. RetireGuide.com. Retrieved July 13, 2024, from https://www.retireguide.com/retirement-planning/risks/longevity/

MLA Turner, Terry. "Longevity Risk." RetireGuide.com, 30 Oct 2023, https://www.retireguide.com/retirement-planning/risks/longevity/.

Chicago Turner, Terry. "Longevity Risk." RetireGuide.com. Last modified October 30, 2023. https://www.retireguide.com/retirement-planning/risks/longevity/.

What Is Longevity Risk?

Longevity risk — also called “outliving your assets” or “outliving your savings” — is the possibility that you will live longer than the funds in your retirement savings, pensions, annuities or other retirement income stream.

Factors That Affect Your Longevity
  • Education level
  • Genes and sex
  • Neighborhood health and safety
  • Personal health and safety habits
  • Your access to medical care
  • Your medical knowledge
  • How well you follow medical advice
  • Your social connections
Source: Society of Actuaries

Longevity risk is also an issue for pension funds or insurance companies that may have additional payouts because the organizations underestimated life expectancies.

But longevity risk also affects individuals in their retirement planning stage since people may underestimate how long they live.

Why Longevity Risk Exists

Longevity is difficult to predict due to rising life expectancy and changing mortality rates. As life expectancies continue to rise, it requires greater retirement plan payouts spread over a longer period than you or your retirement plan originally expected.

In addition, your actual life expectancy is almost impossible to predict accurately, making it one of the most uncertain retirement risks you will face. Typically, individuals tend to underestimate how long they will live in retirement.

For example, the average life expectancy for someone retiring at 65 is about 83 for men and about 86 for women, according to the U.S. Social Security Administration. So, you may plan to stretch your retirement income and savings until you’re around those ages.

But that’s the average, meaning, about 50% of people live that long. About 25% of men and women will live longer than the average.

What’s more, one-out-of-three men and one-out-of-two women who are currently in their 50s will live to be 90. And there’s a 50% chance that at least one partner in a couple will still be alive at 92, according to a 2017 survey by the Society of Actuaries’ (SOA) Committee on Post-Retirement Needs and Risks.

How Can Your Finances Be Impacted by Longevity Risk?

Longevity risk affects your personal finances, but it also affects pension funds and government retirement programs — such as state employee pension plans. The impact on those programs may also affect your finances in the future.

Longevity Risk’s Impact on Personal Finances

For your personal retirement income, longevity risk can affect not just how long your retirement savings may last but also how much you should withdraw monthly.
Retirees prefer not to spend down their assets, instead try to adjust their lifestyle to their regular income even as prices rise, according to the SOA survey.

It can also affect your ability to keep up with inflation, cover health care expenses and pay for long-term care if you ever need a nursing home or assisted living facility. These three conditions have consistently been the top three concerns among retirees, according to the SOA research.

Longevity Risk and Government Retirement Programs

As the population of the United States grows older, government retirement programs will require more financial resources. This might mean you will pay more for Medicare’s out-of-pocket expenses, or you may get fewer benefits from a state employees’ pension plan.

If the Americans live just three years longer than current life expectancy estimates — the costs of aging could go up by 50%, according to a report from the International Monetary Fund (IMF) on the financial impact of longevity risk.

It’s wise to diversify your retirement savings beyond government funded programs to minimize any impact those programs may suffer due to increased longevity risk.

How Can You Make Sure You Don’t Outlive Your Savings?

Annuities and careful self-management of your retirement savings are the two best ways to make sure you don’t outlive your retirement income.

Two of the most widely used options are buying annuities and following what is often called “the 4% rule.” Talking with a licensed financial professional will help you understand other options you have available to reduce your longevity risk.

Follow the 4% Rule

The 4% rule is a retirement withdrawal strategy to self-manage your retirement savings to avoid or minimize your longevity risk.

Following the rule, you draw 4% of your retirement savings total value in your first year of retirement. You then adjust for inflation in each year after that.

For example, if you have $500,000 in a 401(k), then you would withdraw $20,000 — or 4% — that first year. If the inflation rate for the following year is 3%, then that second year you would adjust for inflation and withdraw an additional 3% of $20,000 — or $20,600.

Annuities and Transferring Longevity Risk

Pension funds and insurance companies may transfer longevity risk. But you also have options to transfer your risk.

For instance, insurance companies can transfer risk to individuals through Single Premium Immediate Annuities (SPIAs). An SPIA is a type of annuity you purchase for a single lump sum premium. The insurance company then sends you monthly payments for a specific number of years.

The insurance company cuts its longevity risk, but you assume the risk of potentially outliving the payments.

On the other hand, you may also be able to transfer your longevity risk.

Longevity annuity would be one example. You place a part of your retirement savings into a deferred annuity. This can be over several years or a single lump sum payment. If the terms of the annuity guarantee you payments for the rest of your life, then you will continue to receive a guaranteed annuity income for as long as you live — even if you outlive your life expectancy.

Last Modified: October 30, 2023

9 Cited Research Articles

  1. Külekci, B.Y. and Selcuk-Kestel, A. S. (2021, May 4). Assessment of Longevity Risk: Credibility Approach. Retrieved from https://www.ncbi.nlm.nih.gov/pmc/articles/PMC9042173/
  2. Grant, K. (2018, January 13). If You’re Expecting a Long Life, Take Time to Adjust Your Financial Plan. Retrieved from https://www.cnbc.com/2018/01/12/failing-to-plan-for-longevity-can-hurt-your-finances.html
  3. Rappaport, A.M. (2017, August). What Were They Thinking? Actuaries Respond to the Human Side of Longevity. Retrieved from https://www.theactuarymagazine.org/what-were-they-thinking/
  4. Rappaport, A.M. (2017, August). Findings From the Committee on Post-Retirement Needs and Risks. Retrieved from https://www.theactuarymagazine.org/findings-committee-post-retirement-needs-risks/
  5. International Monetary Fund. (2012, April). The Financial Impact of Longevity Risk. Retrieved from https://www.imf.org/~/media/Websites/IMF/imported-flagship-issues/external/pubs/ft/GFSR/2012/01/pdf/_c4pdf.ashx
  6. North Carolina Future of Retirement Study Commission. (2010, November 16). Final Report. Retrieved from https://www.nasra.org/files/State-Specific/North%20Carolina/FORSCreport.pdf
  7. North Carolina Future of Retirement Study Commission. (2010, November 16). Longevity Risk. Retrieved from https://files.nc.gov/retire/documents/files/Governance/FutureOfRetirement/LongevityRiskExecutiveSummary.pdf
  8. Organization for Economic Co-operation and Development. (n.d.). Mortality and Life Expectancy — Longevity Risk. Retrieved from https://www.oecd.org/finance/private-pensions/mortalityandlifeexpectancy-longevityrisk.htm
  9. U.S. Social Security Administration. (n.d.). Actuarial Life Table. Retrieved from https://www.ssa.gov/oact/STATS/table4c6.html