Retirees face a laundry list of financial risks: market risk, interest rate risk, inflation risk, health risk, to cite a few. Add to that litany yet another uncertainty: longevity risk.
It’s possible that in planning for your assets to last a lifetime, you could be in danger of seriously underestimating how long that lifetime might be. In compiling their 2024 Personal Finance Index, researchers at the TIAA Institute and the Global Financial Literacy Excellence Center at George Washington University asked a question about the average life expectancy of a 65-year-old. Only one-third of those responding knew the correct answer: age 84 for men and age 87 for women. Almost 60% either said they didn’t know or underestimated life expectancy.
“Our research clearly demonstrates a lack of longevity literacy among the vast majority of U.S. adults,” says Surya Kolluri, head of the TIAA Institute. “That affects their ability to prepare for a period that is uncertain in length.” One striking finding is that while women tend to score lower than men in the overall Personal Finance Index, women come out on top when it comes to longevity literacy.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
That may be because women are aware that they tend to live longer than men on average. It’s also true that in family dynamics, women tend to be the caregivers for elderly family members.
That not only brings them closer to the experience of the elderly but also frequently interrupts their careers and opportunities to save for retirement, says Michelle Patello, vice president and wealth management adviser at TIAA. “Because of the savings gap, our research shows that women have 30% less income than men during retirement,” says Patello.
What you can do about longevity risk
Kiplinger writes regularly about how to make your money last in retirement, but you can use some strategies to address longevity risk in particular.
For example, “We focus on re-constructing a regular retirement paycheck to cover living expenses, with two-thirds of your income coming from guaranteed sources,” says Patello.
The first layer is Social Security, the second layer is a traditional pension or other steady income, and the third layer would fill in any gap with a fixed annuity. Once you have your expenses covered, you can use your remaining assets in an investment account to protect against inflation. With a steady income, “you’re less concerned about market risk,” says Patello.
When factoring in your life expectancy, don’t necessarily use age 84 or 87 as an endpoint. “For a 65-year-old couple, there’s a good chance that at least one of them will live to age 90 or 95,” says David McClellan, a partner with Forum Financial Management in Austin, Texas.
“We run the numbers with the assumption that one of them will live to that age unless there’s a medical reason to do otherwise,” he says. “Advances in medicine may significantly extend a very active life, so you need a plan that is going to go on for as long as possible.”
The key to such a plan, says McClellan, is what he calls sustainable spending — how many of today’s dollars you can comfortably spend annually and not run out till age 95. If you have, say, $100,000 in annual expenses, you might aim for enough income to cover 125% to 150% of that amount as a margin of safety.
To generate that income, McClellan prefers a “well-diversified investment portfolio,” and most of his retired clients still have a 50% to 60% stock allocation to maintain purchasing power over time. A less risky option would be to sell your home and unlock your home equity. Either way, the key is to protect against longevity risk without shortchanging yourself today.
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
Related content
-
Why Uber Stock Is Volatile After GM's Cruise AnnouncementUber stock is swinging this week following news that General Motors is restructuring its Cruise unit. Here's what you need to know.
-
UnitedHealth Stock Falls as Lawmakers Eye Insurers, PBMsUnitedHealth stock is continuing to fall Thursday after the introduction of bipartisan legislation targeting PBMs and healthcare giants. Here's what to know.
-
Retirement Abroad? Three Desinations With No Inheritance TaxRetirement Taxes These 2025 top-retiree-friendly countries have an added benefit: potential tax savings for you and your heirs.
-
A Checklist for Retiring in 2025Navigating the final stretch of your professional career can be daunting. We've compiled a checklist to help you put your best foot forward into retirement.
-
Three Possible Tax Impacts for Retirees Under TrumpHow might a second Trump term affect your tax bill in retirement — or the inheritance tax bill for your heirs? This pro has three predictions.
-
What to Know About Leverage and Bitcoin's Meteoric RiseLeverage in the financial world can lead to astonishing success or a crushing collapse. How are investors using leverage to invest in bitcoin?
-
How Do You Know When It's Time to Change Financial Advisers?Sometimes a breakup is for the best. Here's how to handle 'the talk' and make the switch to a new professional who's a better fit for you.
-
How to Get the Maximum Social Security Check in 2025The maximum Social Security check is $5,108 in 2025, up from $4,873 in 2024. Even if you don't qualify for the maximum monthly benefit, you can still increase your payments.
-
The Best Ways to Use Your Year-End Bonus (and the Worst)'National Lampoon's Christmas Vacation' shouldn't be anyone's go-to for financial advice, but it does remind us how not to spend a holiday bonus.
-
Never Talk About Money? For Women, That Can Spell DisasterHow can you plan for retirement when your husband holds the purse strings and talking about money is taboo? Help is at hand for this common problem for women.
