With advancements in healthcare and improvements in living standards, people are living longer than ever before, making longevity risk a critical aspect of retirement planning. Longevity risk—the chance of outliving one’s retirement savings—can create challenges for those aiming to sustain financial security through extended retirement years. In this article, we’ll delve into strategies for managing this risk, sharing practical approaches to help extend retirement savings and align financial plans with the potential for a longer life.

Longevity Risk 101: The Basics

Longevity risk refers to the possibility that individuals may outlive their retirement savings. With rising life expectancies, crafting a durable retirement plan is more critical than ever. It’s becoming routine for retirement to span 20, 30, or more years, necessitating that saved funds stretch further. Preparing for an extended retirement involves striking a careful balance between spending and saving, highlighting the need for strategies that prolong the durability of retirement funds while preserving a retiree’s quality of life. 

Potential strategies for mitigating longevity risk involve a combination of investment planning, income strategies, and flexible spending adjustments to ensure that retirees can confidently manage their financial resources throughout their retirement years. In the next section of this article, we’ll explore specific strategies for mitigating longevity risk, including diversification of the investment portfolio, the role of annuities, the benefits of delaying Social Security, and the importance of flexible spending plans.

Practical Strategies for Mitigating Longevity Risk

These strategies can be useful for many retirees, but it’s important to remember that every individual’s needs are unique:

Investment Portfolio Diversification

Diversification is a foundational principle in investing, and it can be particularly helpful for retirees facing longevity risk. By spreading investments across various asset classes, such as stocks, bonds, and real estate, retirees can mitigate the risk of significant retirement savings losses from any single investment. Diversification aims to balance the portfolio, reducing volatility and providing more stable returns over the long term. 

Considering Annuities

Annuities can be a component of a retirement income strategy, potentially providing a guaranteed income stream to help address longevity risk. Purchasing an annuity from an insurance company involves exchanging a lump sum of money for a promise to receive payments over a set period or for life. Annuities come in several forms, such as immediate, deferred, fixed, and variable, each offering distinct features and advantages. While annuities can provide financial stability through a steady income stream, it is crucial to understand the specific terms, associated fees, and options to make certain they align well with your retirement savings and planning needs.

Delayed Social Security Filing

A frequently underutilized approach to managing longevity risk is postponing the initiation of Social Security benefits. Although individuals are eligible to begin receiving benefits at age 62, delaying benefits until age 70 can significantly increase your monthly payment amount. This increase provides a higher base of guaranteed income later in retirement, which can be particularly beneficial as other retirement savings begin to deplete. Of course, every individual is different, and the decision to delay Social Security should consider personal health, financial needs, and overall retirement income planning.

Flexible Spending Plans (FSAs)

Utilizing a flexible approach to retirement spending may also impact the longevity of your retirement savings. Instead of adhering to a fixed withdrawal rate, adjusting spending based on current market conditions and personal savings can help preserve capital during down markets – which are inevitable from time to time. For instance, reducing non-essential expenses in years of poor market performance can prevent the erosion of principal, allowing your portfolio more opportunity to recover. This strategy requires regular monitoring and adjustment, emphasizing the importance of staying informed about your financial situation and being adaptable to changes (and possibly working alongside a financial advisor).

Don’t ‘Set and Forget’ Your Retirement Plans

If you’re using strategies to mitigate longevity risk, it’s important to frequently reassess. As life circumstances, financial markets, and personal goals evolve, so should retirement plans. Regular reviews with a financial advisor you trust can help you stay on track, make more informed decisions, and adjust your strategies to meet changing needs and conditions. This proactive approach can contribute significantly to achieving the retirement you dream of, prepared to withstand the challenges of longevity risk.

Have You Considered Longevity Risk in Your Retirement Savings Plan?

Addressing longevity risk is crucial in modern retirement planning, as it’s now common for retirement to extend over 30 years or more. Through a combination of diversified investments, considering annuities, postponing Social Security benefits, and implementing flexible spending plans, retirees can improve their financial durability. Continually reviewing and adjusting retirement strategies helps them remain relevant to evolving needs. Although navigating longevity risk can appear challenging, these methods offer a structured approach to help you move forward.

Are you interested in speaking with a financial professional you can trust? Our team provides comprehensive retirement planning services, including strategies for both the accumulation phase and the distribution phase. At Milford Financial, we help our clients with these planning processes and more, and we can help you personalize a retirement plan suited to your unique needs. Schedule a conversation with us today to learn more. We look forward to hearing from you!