Longevity Risk: Are You Prepared to Live Past Your Life Expectancy?

(3 Minute Read)

Most people plan for their retirement by determining an age at which they would want to retire, along with the expected finances to last them through their retirement years. This is a common strategy, and one that produces good results, but what about those who will live longer than their life expectancy? As the average life expectancy increases, many seniors are encountering an inadequate retirement fund to live financially comfortable in the event that they do live past their life expectancy. Longevity risk, the chance that an individual lives longer than expected, can potentially pose a very expensive situation that many retirees aren’t fully prepared for.

Over the past 50 years, the typical life expectancy forecasts have fallen short, which leaves many seniors living past the age that they have been told to expect. When planning for retirement, this presents a very serious financial implication, especially when considering the added medical expenses that old age requires.

The Financial Longevity Risk

When building a retirement spending plan, seniors and retirees often form a budget that includes all expenses and then set an annual retirement withdrawal rate that would be comfortable for them in their lifestyle. Typically, most financial advisors would admit that the average retiree should have enough in their retirement fund to withdraw 4% annually for a 30-year period. However, that standard figure isn’t always going to be best for everyone, especially for those who live past their life expectancy. For these individuals, they may have set an annual withdrawal rate that allows them to live comfortably while their retirement fund still has assets. Once the fund is depleted, however, there becomes a very drastic change in the financial situation for an elder senior. With the rise of necessary medical costs as an individual grows older, this presents a real problem for those who haven’t properly prepared to live longer than their retirement fund lifetime.

Preparing to Live Longer

Anticipating to live longer than expected is difficult, mainly because that preparation means putting finances in place for a period of time that may or may not be there. This is why many people plan based on their expectancy in order to spread their funds out to adequately cover their finances throughout their entire retirement, rather than saving extra for later years that they statistically aren’t planning for.

That being said, healthy retirees who are growing older can still look towards options for increasing their retirement funds, like reducing assets to free up more capital. One such asset that many seniors aren’t even aware they possess is a life insurance policy, especially when they no longer have a need or want to keep a policy alive. Through a life settlement, a senior, typically aged 65 or older, sells their policy to a third-party buyer for a sum of money that is much larger than the policy’s surrender value. This allows the policy to provide great value to the owner during their lifetime, to be used as they need it.

Download our resource, How to Plan for Healthcare Costs in Retirement, for more information on common age-related health issues, their costs, and how you can pay for the care you need.

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