When you hear the words “longevity risk” you may wonder what they’re talking about.
Longevity refers to “long life” or “length of life.” Simply put, longevity risk is the risk that someone will outlive their wealth and available income.
In fact, the risk that someone will outlive their wealth and available income is one of people’s biggest fears in retirement.
People are living a long time, even though mathematical averages have dropped a little bit since the pandemic. Today on average, men can expect to live to 73.2 and women to 79.1.1 It’s important to remember that these estimates aren’t terribly accurate for a particular individual. For each of us, lifespan is affected by additional factors, including health habits, disease, and genes.
From a financial point of view, living a long time can drastically affect many of your retirement costs, impacting and presenting a “risk” to many different items in your budget—right when you will be living on a fixed income.
Let’s examine some of the issues affected by longevity:
- Healthcare
Healthcare expenses are a huge chunk of any retirement budget—even with Medicare. A healthy 65-year-old couple can expect to spend $315,000 in 2022 dollars2 to cover Medicare premiums and out-of-pocket health care expenses, not including long-term care. Living longer not only increases yearly healthcare outlays, but your chances of developing more serious health issues tend to increase as you get older.
- Incapacitation
Your odds of becoming incapacitated also increase with age, which could lead to the need for nursing care. In fact, the majority of people over 65 may end up needing some form of assistance. The average cost of a semi-private room in a nursing facility is $7,908 per month in 2022.3
Yes, you can qualify for Medicaid to cover your nursing home stay—if you spend down all of your assets to poverty level. There are options to this scenario that you definitely want to consider.
- Inflation
Prices will continue to get higher through the years—in fact, inflation is part of the Federal Reserve’s monetary policy, and they strive for 2% yearly. But inflation undermines your purchasing power over time. It goes without saying that the longer you live, the more you will spend on consumer goods and living expenses. Lately, high inflation has dominated the headlines.
- Excess Withdrawal / Inadequate Income
If your portfolio isn’t structured properly to provide enough income for a long life, you really are at risk of running out of money. Unexpected family expenses or needing to withdraw money during a market downturn can affect your nest egg negatively for the long term (kind of like dollar-cost-averaging in reverse). The death of a spouse is also a risk to your income, as Social Security benefits will drop (only one check—the largest—will continue to be paid by SSA) and the tax rate for singles is higher than for married spouses.
The point of this article is not to inspire fear, but to inspire early, realistic retirement planning. Don’t worry about the future–let’s make some solid plans!
