Avoid outliving your retirement savings

Dec 23, 2014

While rising life expectancy is considered a good thing, there is a financial risk involved. As people live longer, the monetary demands mount and it raises serious considerations about longevity risk. Longevity risk, the chance that people will live longer than expected, is potentially very expensive and has serious repercussions when planning for retirement. Outliving one’s savings is frightening.

In India, the average life expectancy was around 42 in 1960. It is now around 67 and 69 years for males and females, respectively. The World Health Organization defines life expectancy as "the average number of years a person is expected to live on the basis of the current mortality rates and prevalence distribution of health states in a population".

But that is just the average. Chances are that most people reading this will live for much longer. The figures are based on the broad population, including smokers and non-smokers, athletes and couch potatoes, healthy and unhealthy, alcoholics and teetotalers, those with access to healthcare and those who cannot afford decent healthcare, and the urban, semi-urban and rural population.

David Blanchett, head of retirement research for Morningstar Investment Management, posted a blog in Wall Street Journal on longevity risk. He believes that those nearing retirement should better understand this term.

Here is an excerpt from his post.

We can’t know how long we’ll live. But what we can do is become better educated on life expectancies.

So what’s the right retirement planning period?

First, the expected length of your retirement should be longer than your life expectancy, since you want a cushion should you live longer than average. For a 65-year-old today in average health, I think the minimum period should be 25 years. For a couple, both age 65 and in average health, I think the minimum period should be 30 years.

However, these are for retirees today. Individuals (or couples) who are younger (e.g., age 25) could easily need to add five or more years to projections because by the time these younger people eventually retire, life expectancies will be even higher (something actuaries call expected improvement in mortality rates).

For those who believe they’ll live very long—past age 95—or for those who don’t want to have to worry about longevity risk, there is longevity insurance. Also known as a deferred income annuity, longevity insurance offers guaranteed income that kicks in later in retirement at a predetermined age. The longer the period from when you purchase the longevity insurance until the income starts, the higher the payout.

Our suggestion: Get serious about your retirement planning. You don’t want to be broke in your eighties! Making smart decisions now will help you enjoy your retirement years.

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