Protection Against Outliving Your Savings
Is your retirement plan based on the current average life expectancy for someone their age, wealth, and health?
Life expectancy is a single number, derived from a single set of assumptions. It is not a guarantee that you will live exactly that long. It is only the number of years that people your age might expect to live on average. While a few people will undoubtedly live to their exact life expectancy and no longer, more than half of us will live a longer period of time – very possibly a significantly longer period of time.
We all want to live longer than average, and we need to plan for the financial implications of living longer. If you develop your retirement plan assuming that you will live only as long as your life expectancy, you may run out of retirement funds. This is a very likely outcome, and even more so for those that have retirement savings.
Defined contribution pension plans provided by employers and unions balance the risk of some pensioners living longer than expected against the likelihood that some pensioners will live shorter than expected. Insurance companies can manage these risks for personal pensions in a similar fashion. Insurance companies then stand behind their guarantees for those policyholders that live longer.
To explore this topic more deeply, we recommend:
Phau, Wade D., “Helping Clients Understand Their Longevity Risk,” Journal of Financial Planning, Nov 2016