Retirees face a wide variety of risks during the “golden years.” One of the biggest challenges is making sure you don’t outlive your money (also known as “longevity risk”). If we knew in advance when we were going to die, managing your money in retirement would be a little more precise. Unfortunately, we don’t come with expiration dates, and science has yet to figure out how to accurately predict life expectancy for an individual.
The insurance industry, on the other hand, has gotten very good at predicting life expectancies for populations. But we make a mistake we when plan around an “average life expectancy” for individuals. The problem with that average is that half of us will die before the “average,” and the other half will live longer than the average. So a 50% chance of being right is not a good foundation for making decisions about retirement money.
So if we can’t tell on an individual basis how long we’ll live (at least not with any good reliable estimates), what can we count on? What can we plan for? For starters, women generally live longer than men. So that means for a given amount of resources at retirement, women should generally consume less than men (because women have to make those resources last for more years).
For a married couple, longer life expectancy for wives means the couple should be giving some thought to her financial needs after he passes away. Again, we don’t know for sure whether a husband or wife will die first; we just know the odds are greater that a wife will outlive a husband. That’s something to plan for.
One way to avoid outliving your income is to have a guaranteed income for life. Social Security offers that, though it’s usually not enough to meet all your retirement needs. Some employers (though fewer than 20 years ago) offer pension plans that give you an option at retirement to choose a lifetime income. As long as you’re alive, you get a check.
But if your employer doesn’t offer that retirement benefit, you can create your own lifetime guaranteed income in at least one of two ways. One is to buy an annuity at retirement (or even better, several over a period of years in retirement). The other is to take out a reverse mortgage. Both of these financial products can provide you with a regular check for as long as you live, which can be a great way to maximize your retirement readiness. We’ll talk about other risks faced by retirees–and ways to handle them–next time.