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Longevity Risk

man-exercising.jpgThe good news? You exercise regularly, eat wisely, keep your weight down, wear your seatbelt, and don’t go bungee jumping or ride a motorcycle without a helmet. Your doctor says you’ll probably live to be 100.

The bad news? Your financial adviser says you’ll probably run out of money by the time you’re 90.

One of the current buzzwords in the financial industry is “longevity risk.” The term describes the possible problem of people outliving their retirement savings.

Capitalism being what it is, of course, someone has come up with a new solution to this problem. In this case, the solution comes from the insurance industry: longevity insurance.

This product, which has been available for a few years now, is essentially a specialized annuity intended to provide an income for people who live longer-than-average lives. The current life expectancy in the U.S. is 80.7 years for women and 75.4 years for men. If your parents or grandparents made it into their late 80’s or their 90’s, and if you are in good health, you might be well above average in terms of longevity. Hence, you might have a high “longevity risk.”

Robert Powell published an article in the June 26 issue of MarketWatch about longevity insurance and did an robert-powell.gifexcellent job of describing the pros and cons of the product. You can read the article here.

The basic idea of longevity insurance is to have a policy as part of your overall retirement savings. You plan to rely on your investment portfolio for income until you reach age 85, at which time presumably you have used up your savings, and then you start getting payments from the longevity insurance.

Apparently most of these policies are an income annuity with a long deferral period and are purchased for lump-sum payments, with $10,000 being a common minimum premium. If you die before age 85, you lose your premium. If you live past 85, you begin receiving a fixed monthly income that is based on the amount of the premium you paid. For example, a 60-year-old male who paid a premium of $16,000 would receive $1,000 a month at age 85.

Powell quoted several financial planners and insurance professionals in the article, including me. As I told him, I am not a fan of longevity insurance. To me, it makes much more sense to address the issue of longevity with an appropriate withdrawal rate on a diversified portfolio of asset classes.

The whole issue of “longevity risk” is also one of the reasons that financial planners shouldn’t be doing “one size fits all” planning. I have clients with life expectancies much higher than average. Part of my responsibility is to help those clients be sure of having a life-long retirement income. We need to work together and actively consider realistic options that fit their individual needs and wishes. I need to help them make conscious, decisions about such factors as the age at which they can retire and the amount of annual income they can comfortably take out of their portfolios.

skydiving.jpgIf you think you’re a candidate for living longer than the average, but you have average or less-than-average assets, you have a couple of options. One choice, I suppose, would be to start skipping the exercise, take up skydiving or other high-risk sports, and start eating more donuts. Or you could decide to consider longevity as an asset, rather than a risk. In that case, it would make a lot of sense to start planning now. Options such as a part-time job or reducing your living expenses can insure that your retirement portfolio won’t run out before you do.

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