In this article:
Longevity risk is the possibility of outliving your retirement savings. This can be a genuine concern, especially considering that the average life expectancy in the U.S. has grown to 77.3 years, although many people will live longer. Since it's impossible to predict how long you'll live, estimating your longevity risk can be complicated. Find out what longevity risk is, how to reduce it and what to do if your savings runs out.
What Is Longevity Risk?
Longevity risk is the possibility that you will outlive what you have in your investments, savings, pensions, annuities and other sources of retirement income. As you live longer, your retirement income must stretch out over a longer time period. Factor in inflation and the growing cost of living, and it's easy to see how you could outlive your nest egg.
Since Social Security started paying monthly benefits in 1940, the average life expectancy for men who reached age 65 in 2022 has increased more than six years to 84.1 years. For women reaching 65 in 2022, life expectancy has increased by about seven years to age 86.7. But that's the average, meaning there's a good chance you could live longer than that.
Consider William and Mary, a hypothetical couple using the Social Security average life expectancy rates to determine how to allocate their money in retirement. If William's life expectancy is 84 years old, he will need to figure out how to make his money last for another 19 years if he retires today at age 65. Mary's life expectancy is 87. Her money will need to last for 22 years if she retires today at age 65. But that's only based on average life expectancy rates. If William and Mary both live to be 95, their money will need to stretch out for 30 years from retirement.
How to Reduce Longevity Risk
Determining how much is enough to live on in retirement shouldn't be an educated guess. Instead, crunch the numbers and enlist a financial planner if necessary to get a realistic idea of how much money you'll have and how much you may still need to save for retirement if you're not quite there yet.
If you worry that "happily ever after" won't last throughout retirement—at least financially—there are some things you can do now to reduce longevity risk.
Delay Social Security Benefits
You can claim Social Security benefits as early as age 62. But if you claim your benefits before you reach your full retirement age—either 66 or 67, depending on when you were born—you may see a permanent reduction in your benefits of up to 30%.
Instead, if you wait to claim your benefits until after your full retirement age, Social Security will add up to an 8% delayed retirement credit for each year you wait up to age 70. Use the Social Security calculator to find out the amount of credits applied if you wait to take your benefits at 70.
Stick to the 4% Rule
The 4% rule is meant to keep your income consistent throughout retirement. It works by not depleting your retirement funds too early so you have enough money in your pocket to pay for necessities and a few extravagances. With this rule, you withdraw 4% of your total investment portfolio in the first year of your retirement and in each subsequent year, adjust your payout based on inflation.
So, if you retired with $500,000 in investments, your first-year payout in 2021 would be $20,000. Using the 2022 Social Security cost-of-living adjustment of 5.9%, your 2022 payout would adjust to $21,180. But the 4% rule doesn't come without drawbacks. There's always the chance you'll overspend or inflation and market fluctuations will put your investments at risk.
Consider Moving in With Children
This may not be an option (or a good option) for many people, but in some families moving in with your kids can be a viable solution to outliving your savings—as long as everyone in the family agrees.
One thing you may want to consider before you make the move is if there is room in the house for one or two more people. How will monthly expenses such as utilities and groceries be split? Will you become a full-time nanny, who will do the cooking and more—and are you OK with that arrangement? A detailed discussion with everyone involved is necessary so that the benefits override any regrets later on.
Consider a Reverse Mortgage
If you're over age 62 and need extra money to cover medical expenses or pay off your mortgage, you might consider a reverse mortgage. A reverse mortgage works by converting part of the equity in your home into cash. Instead of paying monthly mortgage payments, you get an advance on a portion of your home equity as a loan.
You don't have to sell your home, and you still hold the title. The money you receive is typically tax-free. If you eventually want to sell the home, you'll use the proceeds to pay off the reverse mortgage. If you still own the home when you pass away, your heirs will need to repay the loan or refinance it if they want to keep the home, or sell it to repay the loan.
Reverse mortgages come with drawbacks, however. Over time, the balance of the loan increases, as does the interest associated with the loan. Also, the fees that your lender charges can be higher than with other financial products. You are also still responsible for paying property taxes, utilities, insurance, home maintenance and other home-related expenses.
What to Do if Your Retirement Income Is Running Out
If you're beginning to wonder how to pay the bills as you see your retirement funds dwindle, you're not alone. Among those who receive Social Security benefits, 15% of women and 12% of men rely on Social Security for 90% or more of their income. That leaves little for trading in your old car for a new one or taking the vacation you always dreamed you'd take when you retired. If you see your retirement income running out, take these steps now.
Create a Budget
Maybe you've always been good at sticking to a budget. But if you are retired and often coming up short, it may be time to reduce your discretionary spending and find other ways to save money. Once you've come up with a number (and added in a bit as a contingency) it's best to review your new budget often and readjust as needed.
Work Part Time
If your new budget shows an income shortfall, it may be time to take on a part-time job. This could be in the form of working outside the home in a retail setting, or consulting for a company in your former field. You could drive for Uber, walk the neighbor's dog, blog about something you're good at, get a gig in a national park or work as a receptionist for a local doctor. There are many jobs you may be able to do to make up for a shortfall in your income—and you may enjoy your new role.
If you're willing to reduce spending, you might be able to live well on a modest retirement income. Try downsizing to a smaller home, selling one of your cars, lowering your heating and cooling costs, canceling subscriptions to streaming services and eating at home more often.
Also look into whether your Medicare supplement or prescription drug plan is the best price for your situation, use senior discounts, see if you qualify for a discount on your insurance and much more. Reducing your spending can help ensure your retirement savings hold out for the long term.
Live Long and Prosper
Planning for retirement now can help ensure you don't outlive your savings later. But when you have no idea how long you'll live, it's difficult to know how long your money will last. That's why it's never too early to start saving for retirement. If you're unsure how your finances measure up, consider consulting with a financial advisor.