How to Manage the Retirement Risk of Outliving Your Money

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Longevity means living a long life, but it also increases the chance of running out of adequate resources, according to a report recently published by the Society of Actuaries (SOA).

Retirement planning requires having assets and a flow of income to last through retirement, according to the report.

In an interview, Anna Rappaport, a co-author of the report and a member of the SOA’s Committee on Post-Retirement Needs and Risks, discussed the risk of longevity and the ways to manage it.

“The risk means living a long life and, and basically not having enough money to pay for that long life,” said Rappaport. “Retirement planning requires having assets that will last to the longest of, in a couple, the second person to die.”

Longevity risk, said Rappaport, is a failure to plan for that tail end of life. “Many people don't plan for the long term and some that do underestimate longevity,” she said.

According to Rappaport, several types of strategies exist to help manage longevity risk. And, a financial planning process can help pick an appropriate mix of strategies.

Here are some possibilities, according to the SOA’s report:

  • Focus on retirement resources that promise to pay an individual a specified amount for life: Examples include Social Security, traditional pensions and immediate payout annuities.
  • Explore deferred annuity products: These are annuities that do not provide immediate income but do provide income once a person reaches a certain age.
  • Delaying Social Security: Those who delay the start of their Social Security benefits will increase the lifetime inflation-indexed benefit they receive.
  • Maintain a process to provide regular withdrawals with a gradual drawdown of assets: While lifetime income is not guaranteed, this strategy improves the chance of having income longer.
  • Manage the required minimum distributions (RMDs), as defined by the Internal Revenue Service (IRS): The RMDs refer to distributions from IRA and 401(k) retirement savings plans.
  • Consider the home and the value it provides: Retired individuals with outstanding mortgages can effectively improve their monthly cash flow by replacing their conventional mortgage with a reverse mortgage, using the lump sum proceeds of the reverse mortgage to pay off the conventional mortgage.