The Longevity Risk: Outliving your Money

“The question isn’t at what age I want to retire, it’s at what income.” — George Foreman

Recently, Jeanine and I were having dinner with a friend visiting Southern California on business. She lives on the east coast and works for one of the big investment banks as an account manager for their high net worth clients. She has a great gig and dashes around wealthy sections of LA and Orange County dishing out portfolio advice to an impressive list of business and entertainment executives.

When asked what the major concern of her typical client was, she replied, “Outliving their money.”

It’s a fact. We’re living longer. And we better plan for it. Ken Little, the Stock guy at About.com adds this color, “In addition to the usual risks facing investors — inflation, market risk, economic risk, and so on — there is a new risk to confront. Actually, it’s not new, but investors and financial advisors have given it a name: the longevity risk.”

“The longevity risk is the good news/bad news that modern health care has extended the average life span, which is the good news part. The bad news part is that many of us may outlive our retirement plan. That’s the longevity risk.”

He continues, “It’s been around for some time and most financial advisors and folks working in the retirement planning field have been talking up the dangers of outliving your money in retirement for some time now. In the last couple of years, the interest has really picked up as Baby Boomers get serious about their retirement and start doing the math. In too many cases, the numbers aren’t pretty.”

Lewis J. Walker at the Free-Market News Network discusses The Real Retirement Number and writes, “As people reach milestone birthdays like 50, 55, or 60, increasingly they are asking, ‘Am I (are we) on track for retirement?'” Well, I’m not a baby boomer, but I’m about to hit one of those milestone birthdays: forty! It gets you thinking…

“Money magazine noted, ‘57% of workers age 45-50 have saved less than $50,000.’ A new National Retirement Risk Index crafted by the Center for Retirement Research at Boston College in Massachusetts indicated that ‘45% of working-age households are at risk of being unable to maintain their pre-retirement standard of living during retirement.’ (Journal of Financial Planning, 8/06).”

Lesbians, pay close attention to this here: “Women particularly need to be concerned. A 65-year-old woman has a 19% chance of living to age 95 versus 11% odds for a man. If both people in a marriage reach age 65, one of them has a 28% chance of reaching age 95. The odds of long life are even greater if a couple ages 62 to 65 have never smoked and have not had cancer.”

Fred Yager at ConsumerAffairs.Com offers his view on the “longevity risk” and notes, “You have to figure that if the finance experts have a name for a problem, then they probably also have a solution. Recently, a pair of investment gurus were awarded a patent for inventing a system that directly addresses the challenge of outliving our assets.”

“Moshe Milevsky, from York University in Toronto and Peng Chen, president of the investment advisory company Ibbotson Associates were issued U.S. Patent 7,120,01 for coming up with a system that takes longevity risk into account when recommending investment strategies to those looking to finance their retirement.”

“The system considers three basic risk assessments when making asset and product allocation decisions in retirement:

†¢ Financial market risk
†¢ Inflation risk, and
†¢ Longevity risk

This model integrates all of these risks and provides a solution to help investors have a comfortable retirement.” To find out how it works, click over and read the entire article as it’s too long to reprint here… but in my opinion it’s a strategy worth following.

Yager concludes by asking and answering, “So how much do you need to save by the time you retire? There are a lot of ‘guestimates’ but the low end number seems to be around $450,000. Anything lower than that and it becomes a real struggle. To live really comfortably, you need close to $1 million in savings.”

The number is relative so land on the perfect number for you that will minimize the longevity risk. And then, as Robert Powell at MarketWatch reports, “Strike a delicate balance between creating a guaranteed stream of income to meet basic needs in retirement and having a pool of assets that grows and can help one maintain a decent standard of living in retirement.”

Live long and prosper!