Longevity Risk in Retirement: How to Make Your Money Last Titelbild

Longevity Risk in Retirement: How to Make Your Money Last

Longevity Risk in Retirement: How to Make Your Money Last

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What happens if your retirement lasts longer than you planned?Longevity risk is the possibility of outliving your retirement savings, and it becomes increasingly important as retirees face longer lifespans, rising healthcare expenses, inflation, and decades of withdrawals from their portfolios.In this episode, Greg Welborn of First Financial Consulting explains why longevity risk is about more than simply living longer. A retirement plan also needs to account for whether your income and investments can continue supporting your lifestyle throughout those additional years.One of the first challenges is the length of retirement itself. Many retirees may need their savings to support 20, 25, 30 years or more. The longer retirement lasts, the more time inflation, healthcare expenses, investment markets, and unexpected costs have to affect the plan.Healthcare and long-term care can add another layer of risk. Medical expenses may increase faster than general inflation, and a longer lifespan can increase the likelihood of needing more extensive care later in life. These costs can place additional pressure on a retirement portfolio at the same time that other living expenses continue to rise.Inflation also steadily reduces purchasing power. Even relatively modest inflation compounded over several decades can dramatically increase the amount of income needed to maintain the same lifestyle. That means a retirement portfolio may need to provide current income while also maintaining enough long-term growth to help keep pace with rising costs.Market volatility creates a different problem. A market decline doesn’t necessarily create a permanent loss for an investor who can remain invested and wait for a recovery. But retirees may need to make portfolio withdrawals regardless of what the market is doing. Selling investments during a significant downturn can turn temporary declines into permanent losses and increase sequence-of-returns risk.Greg discusses why retirement portfolios therefore need to balance several competing objectives. Being too conservative may leave a portfolio unable to keep pace with inflation, while being too aggressive can expose a retiree to significant volatility and liquidity problems during a market downturn.One way to think about retirement assets is across different time horizons. Some assets may be positioned for near-term expenses, others for income needs several years into retirement, and others for longer-term growth. The appropriate mix will vary depending on spending needs, risk tolerance, Social Security, pensions, and other sources of retirement income.Tax planning is another important part of managing longevity risk. Withdrawals from taxable, tax-deferred, and tax-free accounts can have different tax consequences, making the timing and source of retirement withdrawals an important part of a long-term income strategy.Greg also discusses Social Security claiming decisions. Delaying Social Security after full retirement age can increase the monthly benefit, but whether delaying makes sense depends on longevity expectations, health, other income sources, and the broader retirement plan.Ultimately, longevity risk cannot usually be addressed with one investment or one rule of thumb. It requires coordinating investments, income sources, taxes, liquidity, healthcare planning, and spending over what may be a retirement lasting several decades.Topics discussed in this episode include:What longevity risk means in retirementPlanning for a 20- to 30-year retirementInflation and purchasing powerHealthcare and long-term care costsMarket volatilitySequence-of-returns riskRetirement portfolio diversificationBalancing growth and liquidityShort-, intermediate-, and long-term retirement needsTax-efficient retirement withdrawalsSocial Security timingPensions and other retirement incomeBuilding a sustainable retirement income strategyTimestamps00:00 — What is longevity risk?01:00 — How living longer affects retirement finances03:26 — Healthcare and long-term care costs04:24 — Inflation and market volatility05:56 — Why market downturns can cause permanent retirement losses06:58 — Strategies for managing longevity risk07:52 — Structuring investments across different time horizons09:17 — Why one-size-fits-all retirement models fall short09:51 — Tax-efficient withdrawal strategies10:51 — Maximizing Social Security benefits11:46 — Integrating pensions and other income sources12:16 — Bringing the retirement strategy togetherRelated ReadingLongevity Risk in Retirementhttps://firstfinancial.is/longevity-risk-in-retirement/ The information discussed in this episode is intended for educational purposes only and should not be considered individualized financial, investment, tax, or legal advice. Everyone’s financial situation is different, and the strategies discussed may not be appropriate for every investor. First Financial Consulting is an independent, fee-only fiduciary financial ...
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