“Getting down off the mountain can be as treacherous as the ascent, especially if you grow complacent.” Lawrence Castillo


By Lawrence Castillo

Multiple surveys indicate that most Americans are concerned about outliving their money once they stop working. This fear is understandable, even justified, given our current high inflation and precarious economic situation.

Beginning in the 1980s, the shift from defined benefit plans (pensions) to defined contribution plans (individual retirement accounts) created more significant financial burdens and more risks and responsibilities for retirees. Since most Americans no longer have company pensions, they must now tackle the task of planning for longevity risk. Longevity risk is the concept that a person might live so long that they use up their retirement savings and will become dependent solely on Social Security.

Longevity risk remains a troublesome issue because it multiplies other threats to your retirement, such as market risk, inflation, and increased medical costs. It’s impossible to accurately calculate how long you’ll live and how long what you’ve saved will last. Living longer is fantastic, but you’ll need more savings to maintain your lifestyle and address other factors that can erode your wealth.

Further complicating the issue of longevity risk is that most financial planners who are highly adept at getting their clients up the “accumulation mountain” are not always equipped with the skill sets and tools needed to bring those retirees down safely.

Most planners are well-versed in the art of saving money but lack understanding and training once their clients are set to retire. Such a lack of knowledge of the “decumulation” phase means these advisors could expose their clients’ wealth to the harsh and multiplying element of longevity risk.

Longevity risk makes everything worse: returns risk, mortality risk, withdrawal rate risk, taxation, and regulatory risk. Also, the products and procedures used to help you save for retirement are not the same as those needed to ensure you don’t run out of money in retirement.

So, what can you do to buffer against longevity risk? Well, stocks, bonds, or mutual funds may not be able to accomplish this as they could experience market turbulence. To bolster your wealth against the effects of living too long, you must create a guaranteed lifetime income stream uncorrelated to the stock market. The most common way to achieve this is through annuity products such as lifetime income annuities, deferred income annuities, or fixed annuities. Before you tell me how much you hate annuities, let me ask you a few questions.

  • Do you want to lose your initial investment, or would you prefer the protection of your principal?
  • Is guaranteed, predictable money something you’d like, or would you rather have unpredictable, fluctuating income with no guarantees?
  • Do you think you might need long-term care someday, or do you believe you’ll be healthy until you’re 100?
  • Do you want to give something to loved ones, or do you want to leave no legacy?

Depending on how you respond to these questions, an annuity may be what you need to fortify your portfolio against longevity and other risks.

Research demonstrates that those with a least one income stream in addition to Social Security to help them handle basic needs are healthier and happier. If you don’t want anxiety and fear to rule your golden years, having a guaranteed paycheck that you won’t outlive is one way to ensure that won’t happen.

Annuities are incredibly flexible but can be somewhat complicated. Therefore, you should diligently research this product and seek advice from a qualified annuity specialist. Now might also be an ideal time to meet with your advisor and check your portfolio mix to ensure it’s well-balanced per your risk tolerance and financial goals.