Longevity risk
The risk of living longer than expected and outlasting retirement savings or income.
What it means
Longevity risk is the chance that a person lives longer than their money does. Life expectancy is only an average, so many people live well past it, and for a married couple the odds that at least one spouse reaches an advanced age are higher than for either alone. Planning to an average age therefore leaves a real chance of running short.
The risk interacts with inflation and health costs, which tend to rise in late life. Sources of income that last for life, such as Social Security, pensions and lifetime annuities, reduce it. So do delaying Social Security for a larger check, spending conservatively and planning for a longer horizon than life expectancy alone suggests.
Example
For example, a retiree who plans for savings to last until 85 but lives to 95 needs ten more years of income. At $50,000 a year in today’s dollars, that is roughly $500,000 more in spending to fund, before accounting for inflation or investment growth.
How it’s used
- Choosing a planning horizon for a retirement projection
- Deciding when to claim Social Security
- Weighing a pension annuity or lifetime annuity against a lump sum
Good to know
- Many planners run retirement projections to age 95 or beyond, especially for couples.
Related terms
Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.