Longevity Risk – What it Means to Your Financial Plan

By Leah Jones on April 17, 2017

Longevity Risk is a fancy way of saying the risk associated with you running out of money because you live too long.  It’s a very real risk facing many Americans.

There are a couple of reasons why this is a real risk.  One reason is that new healthcare advances are aiding in Americans living longer every day.  There is no anticipated slow down in medical advances and some of the red tape being removed might result in future advances happening more quickly. The second reason is Americans are consciously living healthier lives, from organic foods, to the latest work out craze, to removing toxins from their home and an aggressive push away from smoking, etc.

Furthermore, many Americans are no longer doing hard core physical labor as we have transitioned to a service-based economy, the majority of Americans work in front of a computer all day versus working in a coal mine.  It’s logical to conclude, given these medical advances and structural changes in the way people live their lives and the type of work they do, that Americans will live longer lives in the future.

Another important concept to understand is averages.  As the chart provided by JP Morgan below shows, in 2015 the average life expectancy at age 65 for a women is 85.5 and for a man is 83.1.

One might logically conclude by looking at these averages, that you only need to plan for your assets to support you in retirement for 20 years.  Let’s keep in mind the definition of average, a single value that summarizes or represents the general significance of a set of unequal values.  Meaning there are many lives that last much longer than the average, so to set your financial goals based on averages is potentially setting yourself up for failure.

Another surprising statistic for most is that a couple aged 65, has a 20% probability that one of them will live to 95!  If you are a gambler, that’s 1 in 5 odds.  There is  probably a higher chance of surviving that late into life than most people would imagine.  Conservatively, you need to plan for at least 30 years of supporting yourself financially in retirement, assuming you retire at age 65.

Our philosophy is to plan for the worst and hope for the best.  Our goal is to ensure our client’s never run out of money and plan accordingly.