What is Longevity risk?

The risk that in retirement you will consume the wealth you saved up before you pass away.

How this risk plays out in the real world

Oct 27, 2024: More families making over $150,000 are living paycheck to paycheck
Aug 14, 2024: Why are investors turning to bonds? Experts weigh in
Mar 05, 2021: A Year Into the Pandemic, Long-Term Financial Impact Weighs Heavily on Many Americans
Sep 12, 2020: A Shocking Number of High Earners Have No Retirement Savings
Feb 22, 2018: This Is What Life Without Retirement Savings Looks Like
Aug 24, 2017: Most Americans live paycheck to paycheck
Jul 19, 2016: California’s Pension Funding Crisis Just Got Worse
Oct 27, 2015: Why 8,737 UPS retirees are bracing for pension cuts
Oct 20, 2015: Companies increasing dollar-for-dollar 401(k) matches
Mar 30, 2015: Almost Half of Americans Aren’t Saving Nearly Enough
Sep 07, 2014: America is Turning into a Nation of Freelance Workers
Nov 07, 2013: Consumers Have Unrealistic Expectations About Retirement, Study Says
Sep 04, 2012: Many New Jobs Are Low-Wage (And Bad For Our Retirement Savings)
Sep 04, 2012: Financial crisis ushers in ‘The Age of Safety’ for investors
Sep 15, 2010: Retirement on Hold: American Workers $6 Trillion Short

Connection to other risks

This risk relates to Inflation risk. Even if you save up a big pile of money over several decades, if inflation is significant over that same time period, what you earn with your investments may not buy enough for you to live a reasonable retirement. For example, if inflation is 3% per year, in just 24 years, the prices of the goods we buy and services we consume will double.

How investors can manage Longevity risk

  1. Save up enough money that you can live off what your savings earn each year. By never having to spend any of the wealth you accumulated, it will earn money for you year after year. For example, if you accumulate $1 million by retirement and earn 5% on it, that’s $50,000 coming to you each and every year. Of course, as you are nearing the end of your life, you can also start spending the $1 million itself.
  2. Purchase an annuity, a special type of investment / insurance policy that allows you to pay an insurance company money in the years leading up to retirement and to collect money from the company from the year you retire until you pass away.