How Does Longevity Risk Affect Retirement Planning?

How Does Longevity Risk Affect Retirement Planning?

It’s been said that the 70s are the new 50s. But if a new research study is any indicator, U.S. life expectancy may be set to grow even more. With current American life expectancy sitting at 78.8 years, researchers at Imperial College and the World Health Organization project that longer lifespans could be in store.

According to the researchers’ findings, U.S. life expectancy would lengthen to 83.3 years for women and to 79.5 years for men. The predictions jar against data published in December 2016 in a longevity report from the Center for Disease Control, which found U.S. life expectancy dropped in 2015 – the first time in 20 years.

Now, why does this matter? Longevity risk, or the possibility of running out of money in retirement. As life expectancy rises, the amount of post-work years for which you will need money may increase. According to the Social Security Administration, 25% of 65-year-old Americans today will live past age 90, and 10% of 65-year-old Americans will exceed 95 years of age. So, it’s important than ever to plan for old age in your financial future.

Source: Graph created by using data from LIMRA Secure Retirement Institute, August 2015, All rights reserved.

There are a number of potential challenges tied to increasing lifespans, and if they are neglected the effects could be costly. Here’s a quick look at some of the ways longevity can affect your retirement picture – and some factors you may want to account for in your post-work financial planning.

Three Challenges Tied to Longevity in Retirement

Inflation. When it comes to retirement planning, inflation is often mentioned as a top concern by pre-retirees and retired Americans. It’s no surprise why. Over the long run, inflation can have a significant impact on the buying power of your retirement money. Even if it stays low!

Let’s consider some examples in action of this. According to LIMRA Secure Retirement Institute, inflation can be a great wealth-erosion factor even at recent low historical rates. In one illustration, the institute looked at cumulative effects of inflation over a 20-year retirement period, assuming a fixed monthly income of $1,341 – then the average monthly Social Security benefit in January 2016.

Over a two-decade retirement span, starting out from the $1,341 marker, inflationary effects led to financial shortfalls of $34,406 to $117,553, using inflation projections of 1-3%. These figures can be seen in the illustration below.

Source: “Even When Inflation is Low, It’s Higher for Retirees,” LIMRA Secure Retirement Institute, April 2016, Source Link.

Consider these other effects of inflation in the long run:

  • In 1986 the median sales price for a new home was $86,600; with cumulative inflation of 118.3% over 30 years, the median sales price in 2016 was $189,051.
  • From 1984 to 2015, the cost of medical care soared 322%.

Which brings up the next challenge relating to longevity…

Health-related expenses. Retired Americans feel the pressures of health costs more than younger-aged Americans. And over many years in retirement, health-related spending sure can add up. According to the most recent data from Centers for Medicare & Medicaid Services:

  • Healthcare spending per person for individuals aged 65 and older was $18,988 in 2012.
  • For people who are 65 and older, that was around 300% higher than spending per person of working age ($6,632 in 2012).
  • For the elderly, that was 500% higher than healthcare spending per child ($3,552 in 2012).
  • Age 65-and-older Americans made up the smallest population segment, accounting for only 14% of the population, but they were behind 34% of all total spending in 2012.

Of total national health expenditures (NHE), Medicare spending accounted for 20% of NHE ($646.2 billion in 2015). If someone retired in 2016, they might pay up to $33,000 more in retirement healthcare costs than someone who retired in 2015. Moreover, data from the U.S. Bureau of Labor Statistics indicates that healthcare spending tends to increase over time as people age.

Market volatility. Whether someone is already retired or is in the “pre-retirement stage” – 3-10 years out from their target retirement date – market fluctuations could put long-term financial security at jeopardy.

If an investor had a retirement portfolio with a heavy allocation of market-based investments, and the stock market fell, that investor could sustain serious losses. In turn, those losses could dwindle the assets that otherwise could be used for retirement income.

Or say someone were in the early stages of their retirement years. Serious portfolio losses could lead to “sequence of returns risk” – or the potential danger of getting low or negative returns as you withdraw money from your portfolio and other income sources.

This sequence of returns risk could be detrimental. Take this example of historical performance data up until 2015 of the Dow Jones Industrial Average, with the performance data courtesy of Guggenheim Investments.

Source: Graph created by associates using data from and information from graph “Dow Jones Industrial Historical Trends” from Guggenheim Investments. All rights reserved.

In terms of cumulative returns, you may be surprised by the results. According to the data from Guggenheim Investments, over 118 years, the market gave low cumulative returns for 71 years, or 60.2% of the time! Now imagine if retirement asset values did fall due to a down-market period. The time-frame for recovery could take years, a luxury which many Americans can’t afford during their retirement years. Examples of this can be seen below.

Of course, this market risk isn’t just in the stock market. The Fed has indicated there may be interest rate hikes here in 2017, possibly as many as three. With President Trump in the White House and interest rates already lingering at historical lows, a rate hike would have adverse effects on bond values. Bond values would fall as interest rates rose.

How Can You Prepare for Longevity in Retirement Planning?

Ultimately, a retirement financial plan can account for longevity in a number of ways:

  • Retirement financial planning should be done with a long-term outlook – plan for old age. Possibly for 20-30 years or longer. It’s better to have safeguards in place against longevity risk than to be making heavy changes for longevity to your plan as you progress in your retirement years.
  • The plan should include long-run projections for monthly budget needs and discern what income streams will be used to pay for those expenses.
  • If it makes sense for your financial picture, a careful Social Security claiming strategy could be used to maximize benefits. For each year you delay claiming your benefits past your Full Retirement Age – for many people, this is age 66 – your benefits increase by 8% per year. You could receive up to 32% more money for life with a delayed claiming strategy at age 70.
  • Depending on your needs, goals, and situation, investigate strategies to keep the “can’t afford to lose” portion of your assets safe, and to generate lifelong income you can count on.

If you are ready for help with planning for longevity and other retirement risks, can assist you by putting you in contact with a knowledgeable financial professional. Use our Find a Licensed Advisor section to connect directly with an independent financial professional, and to request a personal strategy session to discuss your needs and goals. And should you have any questions or concerns, call 877.476.9723.

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