Is Longevity a Risk?

Tim Watters |
Is Longevity a Risk?


Life expectancies have been rising for decades and  the number of centenarians in developed countries is growing 5% per year.  Of course, not that many people make it to that age. A more impressive statistic is offered by JP Morgan's Guide to Retirement which shows that  a 65 year old married couple  has a 73% chance of at least one person reaching the age of 85 and a 47% chance of at least one person making it to the age of 90. Also, these are averages including smokers, people who are obese, and people with health problems .Typically,  my clients are well educated and financially more secure.  The higher the level of education, the less likely people are to smoke and/or to be obese. Thus, I would suspect that these numbers would skew towards higher ages if you exclude smokers.


According to the Society of Actuaries, 40% of adults underestimate their life expectancy by five or more years. People are often more risk averse as they get older and would prefer a less volatile portfolio. Yet, this short term risk aversion increases your risk of outliving your money. Not only are bond yields low today but many think that rates will rise in the years ahead. As yields rise, erosion of principal in bond investments often  takes place. This does not mean that you should jettison bond related investments but it does mean that diversification in your bond strategy is essential. It also means that it is important to be conservative in your withdrawals from a retirement portfolio.


Delaying filing for Social Security benefits is one of the wisest courses of action. By delaying filing for Social Security benefits from age 62 to age 66 (if born 1943-1954) will increase your benefits by 25%. By delaying from age 66 until age 70, you will get 32% more in benefits. Where else can you guarantee a 7.3% compound growth rate on your money (annual growth in benefits age 62-70)? Also, delaying filing gives you a higher inflation adjustment each year.


Be realistic about withdrawal rates. If you had an apple tree, it would give you a yearly harvest that would last for years. However, if you cut off a few branched each year, the harvest will decline. In this environment, it pays to be prudent about withdrawals. I recommend that portfolio withdrawals not exceed 3% per year (rising with inflation), especially in the first ten years of retirement. Taking out more than this is the equivalent of cutting branches and could lead to a shortfall later in retirement.


 You need to understand all of the factors that lead to a successful retirement. You control how much you spend and the portfolio model you chose. You have no control over market returns and/or government policies and you have some control over your longevity and your decision of when you retire. Make the most of the things you can control.