Longevity risk: Making money last as long as you do

How long should you plan to live?

No one can really know, of course. But the answer to that question may be the most critical factor in making a successful financial plan for retirement.

Expected longevity for men and women at age 65 has jumped more than 10 percent since 2000, according to the Society of Actuaries. Men who reach age 65 can be expected to live to an average age of 86.6, and women to 88.8.

And those figures are only averages, said Vickie Bajtelsmit, a professor of finance at Colorado State University whose research focuses on retirement and financial planning. Working with Social Security Administration mortality data, Professor Bajtelsmit calculated that a 65-year-old man has a 20 percent chance to live to 90, and the odds jump to 30 percent if he is in better-than-average health.

Meanwhile, she concluded, 31 percent of women who reach age 65 will make it to 90. And for those with better health, the figure is 42 percent. Here’s what her numbers show:

Those odds produce what experts call longevity risk, which is the danger of exhausting resources before the end of life.

Joe Tomlinson, a financial planner and actuary based in Greenville, Me., who has done extensive research on retirement planning, created a custom projection that illustrates the challenges of managing longevity risk with savings alone; The chart below makes the point that even retirees with sizable savings face significant risk of exhausting their accounts during their lifetimes.

The chart relies on the so-called Monte Carlo method of risk simulation, which analyzes thousands of possible outcomes. Mr. Tomlinson found that a hypothetical couple who had managed to amass $1 million in 401(k) and I.R.A. accounts, and whose annual expenses for essentials would reach $70,000 , faced a 47 percent chance that their retirement plan would “fail” during their lifetimes, assuming they retired at age 65 and claimed Social Security benefits then.

Failure means a forced, sharp cut in living standards. Those whose plans fall into that unfortunate 47 percent “will, on average, fall short of being able to pay for essentials by $168,000 over their lifetimes,” Mr. Tomlinson said. And that’s without considering any high-cost emergency expenses, like home repairs or uninsured medical costs.

Despite the uncertainty, experts offer several steps for mitigating longevity risk. I explored their strategies in my Retiring column for The New York Times last weekend.


  1. matt forman says:

    Hi Mark –
    Your article states that it’s possible to “maximize” the total Social Security benefits by delaying the start date. And it’s true that if you delay, you’ll get more per year. However, as you acknowledge a couple paragraphs later, the cost of waiting until 70 instead of 66 is the amount one gives up by claiming later. Did you mean to say that one should therefore be indifferent between the two options, and that there is no real way to maximize total lifetime payout? This is what the Social Security Administration itself indicates on its own website. Also see this link: https://www.fool.com/retirement/general/2014/09/21/why-smart-people-take-social-security-benefits-ear.aspx. Thus, by the actual math (and I can send you a spreadsheet about this), I would argue that retirees should always take the benefit at the earliest age. Have I misunderstood something?

  2. Mark Miller says:

    Matthew, that’s a great question. This is a topic of some lively debate, but here’s my view: since it’s not possible to know what your lifetime payout will be, it’s best to maximize monthly/annual income for the reasons stated in the article… unless the beneficiary has reasons to expect not to live long (poor health). I look at Social Security as insurance, not an investment. The lifetime payout orientation is an investment orientation – “how much did I put in, how much will I get back.” Hope this helps?

  3. matt forman says:

    Mark – thanks for this reply. Just to crunch a few rough numbers per the SSA website, the current retirement benefit today at age 62 is $2,153/month. So if I wait until age 66, then I’ve lost 4 years of those benefits, or $103,344. People retiring today at age 66 get a benefit of $2,687, or $534 more per month compared to age 62. So it would take me a little over 16 years to break even ($103,344 divided by $534), at which point I would be 82 years old, not factoring in any investment income from the $103,344 over that time period. Every year I live beyond age 82 will indeed give me more (non-present value) total lifetime benefits, but in my opinion, the relatively small incremental difference is not worth the gamble. Example: if I make it to age 90, my lifetime benefit would be $773K vs. $723K. For the additional $50K, it’s not high enough of a payout to bet that I’ll live that long. (And again, I think the SSA’s analysis is that I could have invested the $103,344, in which case I would have made up the $50K , such that both scenarios are actually equivalent.) Have I miscalculated?

  4. Mark Miller says:

    Matt, Your numbers sound reasonable. I don’t have the time to check them myself, but you might want to backstop your analysis with one of the online decision tools. There are a number of good ones, although I especially like Social Security Solutions (http://socialsecuritysolutions.com/). Also take a look at this article I wrote a while back, especially the illustration of cumulative benefits. What you see there is that the big payoff occurs in the out years, if someone lives well past the averages (http://retirementrevised.com/social-security-to-the-max-strategies-for-affluent-households/). Two other things worth considering are: 1) is there a spouse in the picture who may outlive you and beat the actuarial averages by a significant amount? and 2) when you optimize Social Security income, you are optimizing an inflation-protected source of income – something that is very valuable and rare.

    Having said all that, it’s a highly personal decision. I usually try to make the point that delay isn’t right in all cases. But I think that, more often than not, it is the right move.

  5. matt forman says:

    Thank you again for this response, and based on the second link you provided, it appears that you agree that the initial years past break-even age provide only marginally higher lifetime payouts. So it’s really the out years that matter. But the likelihood of of a 62 year old’s reaching those out years is small – 20 to 30% to reach age 90? (I’m finding varying numbers on that.) Thus, I would argue that for the large majority of people, the best move, based purely on actuarial odds, is to take the money early. I think I understand your point about viewing this like insurance – even if only 20% of the population will suffer a house fire, everyone still needs to buy the insurance. But one must measure the cost of the insurance, the likelihood of peril, and the magnitude of the peril. Thus, as Consumer Reports advises, it doesn’t pay to buy extended warranties on many items, because the likelihood of breakdown is small and the cost of the insurance is too high in comparison to the value of the item. So here, the insurance premium is hefty – approximately $100K, and the likelihood of peril is remote. And even in the out years, the magnitude/consequence of the peril is relatively small. The risk of receiving only $675K in lifetime payouts by age 90 instead of $775K is arguably not a great peril (or if it is, the $100K premium is too expensive to cover that remote risk).

  6. Mark Miller says:

    Yes. But, I would suggest looking at it as monthly/annual income, rather than cumulative. And, consider whether other resources will be available for someone age 90 or 95 to cover non-discretionary costs (including health care). Have savings been exhausted? Is there a defined benefit pension in the picture? An annuity? The substantial difference in monthly/annual income – with COLAs – could be a life-saver.

    But, as I say, it is a highly personal choice.

  7. I based decisions on a Wharton study back in 2007 and bought enough joint immediate annuities (with a guaranteed 20-year payout to beneficiary should we both die) that when combined with delayed Social Security (using claiming strategies) and a few small pensions, provides enough income that our remaining nest egg should help with healthcare expenses later in life. A couple of years ago I purchased inexpensive individual longevity annuities for us to increase our income at age 85, to help with inflation since our immediate annuities were not inflation adjusted. This is a very conservative course, but it provides the opportunity to take more risk with the remaining nest egg. And we sleep well.

  8. Interesting discussion. I am firmly on Mark’s side here, because I view SS as it was oringnally intended: old age insurance. It seems to me that maximizing total returns is a fine goal for most of one’s portfolio, but it’s more prudent to exclude SS from that approach. As Mark said, it’s a highly personal decision that depends on things like family history, health, and available other assets.

    Optimally, a person would perform this analysis early enough in their life that they can position themselves to do two things: delay drawing SS until age 70 AND accumulate enough savings to make this delay completely (or largely) painless.

    If you’re at or near retirement age, this debate is a tougher one, but if you are below the age of 55 it seems to me that you would be far better off planning on retirement income before age 70 that consists solely of savings, and to plan on taking SS at age 70. With medical advances, it’s quite likely that the odds of living longer will increase, and as someone who had three of four grandparents live to or beyond 100 years of age (and a 4th live to mid-90’s) I’ve seen the strain on retirement savings that comes from living far longer than one had planned or saved for. SS as insurance is a strategy that I cannot recommend highly enough…

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