Retirement Planning: Are Investors Underestimating Longevity Risk?


Risks investors face in retirement

Could you be underestimating the chance that you’ll outlive your retirement savings? Investors in retirement face a number of risks, including market risk (volatility), health risk (unexpected health costs), policy risk (social security reform), family risk (giving money to family members), and longevity risk (risk of outliving your wealth).

A recent study conducted by the Center for Retirement Research at Boston College found that, among these risks, investors perceive market risk to be the biggest threat in retirement. But objective research shows that longevity (followed by health) is actually the biggest risk retirees face.

How investors perceive risk

Why the disconnect between perceived and actual risks? Survival pessimism. In other words, retirees tend to underestimate how long they’ll live and also how much their health costs will be later in life.

While a 20-year time horizon used to be the gold standard for retirement planning purposes, that may be too short today. Assuming a retirement age of 65, recent research shows that more than 25% of men and 30% of women will need enough money to sustain spending over a 30-year time horizon. And, looking at the longevity risk of couples, there’s a 46% chance that at least one member of a couple will need to make their money last for 30 years or more.

Prioritizing longevity in retirement planning

Investors’ perceptions of risk could cause them to make decisions that put their retirement goals in jeopardy. When you over-exaggerate market risk, you may be tempted to invest too conservatively (i.e., a traditional fixed income tilt). This could put you at risk of underfunding your retirement, especially with today’s bond yields already near zero.

Likewise, if you underestimate your longevity, you may be misled into thinking you’ll need less money in retirement than you do or that you can spend more than you should.

Financial advisors can play an important role

All investing involves risk, no matter what stage of life you’re in. Whether your goal is to grow your wealth, protect it, or not run out of it in retirement, the risks you face will change as you move along your investment journey. While there’s no way to take risk completely off the table, it makes sense to try to manage it as best you can.

That’s why we believe it’s important to talk with a financial advisor or financial planner about these risks — not just once you reach retirement, but also as you plan for your golden years. A financial professional can help you understand the risks specific to your situation and then formulate a plan designed to meet your financial goals.

Interested in a retirement income strategy focused on managing longevity risk? Talk to your financial advisor about Real Spend®.


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