How to Manage the Financial Risk of a Long Life

••• Getty Images 

It might sound strange to describe the possibility of living a long life as a risk. But longevity risk is a real concern when putting together a retirement plan, and the last thing you want is to outlive your money. Here are some ways to make sure your money lasts as long as you do.

1. Build Your Financial Plan Around the Assumption of a Long Life

When using a retirement planning calculator, one of the essential inputs is how long you think you’ll live. Different calculators use different terms, such as “planning age” or “years of retirement income,” but they’re all asking the same thing: “How long do you think you’ll live?” Or more starkly, “At what age do you think you’ll die?”

It isn’t a pleasant question to consider, but it’s important. Your assumed life expectancy will have a significant impact on how much money the calculator will determine you need to invest each month right now in order to have enough to cover your expenses for the rest of your life. If you choose a “planning age” of 80, the calculator will come up with a much smaller monthly investment amount than if you choose age 90. But if you live longer than 80 years, you may run out of money.  

What to do? Unless you have a serious medical condition or a family history of short lives, assume you’ll live a long time. A good, conservative planning age is 95. If you end up with more money than you need, that’ll be a far better problem than ending up with too little.

2. Hold off Taking Social Security Until Full Retirement Age (Preferably Until 70)

The earliest age you could start claiming Social Security benefits is 62, and that is still the most popular choice among retirees. However, the longer you hold off (up to age 70), the more your monthly benefit amount will grow.

For example, my age-62 monthly benefit amount is $1,809. However, if I hold off on claiming benefits until my full retirement age of 67, I’ll qualify for $2,750 (a raise of more than 50%). If I can wait until age 70, my monthly benefit will be $3,522 (28% higher than my age-67 benefit and 95% higher than my age-62 benefit!)

To see your estimated benefit amounts at different ages, sign up for an online account with the Social Security Administration.

It’s true that the longer you delay taking benefits, the longer you have to live in order for your cumulative benefits to exceed those you would have received if you claimed earlier. However, with people living longer than ever, the odds of collecting more total benefits by waiting are in your favor.

Here’s one other important reason to delay your Social Security benefits. For married couples, if the spouse with the higher benefit amount dies first, the surviving spouse will be able to replace his or her benefit with their spouse’s. Because women tend to live longer than men, if the husband qualifies for a higher benefit amount, it would be especially advantageous for him to hold off on taking benefits as long as possible.

3. Consider Purchasing a Longevity Annuity

Even if you’ve planned for a long life and held off on claiming Social Security benefits as long as possible, it’s still possible to run out of money at some point, perhaps due to significant healthcare costs or a serious and long-lasting bear market. To protect yourself, consider buying a longevity annuity.

This type of annuity, which is sometimes referred to as a deferred income annuity, is similar to an immediate annuity in that you pay a lump sum in exchange for a monthly benefit. However, whereas immediate annuities begin issuing monthly benefit checks right away, longevity annuity checks begin 10, 15, or more years in the future.

Because of that delay, longevity annuities require a much smaller up front investment. For example, using Vanguard’s online annuity estimator, if a 65-year-old man wanted to receive $2,000 per month right now, he would have to invest a lump sum of nearly $360,000. However, if he wanted to receive $2,000 per month starting at age 80, his required investment amount would drop to $117,000. You could even use money in an IRA or 401(k) to buy the annuity.

If you’re blessed with a long life, making sure your money lasts as long as you do will be an important factor in how much you enjoy your later years. Taking the steps described above should help.