Longevity risk: the risk of outliving your money…that is, the risk of running out of money before you do breath. This is the number one fear of most retirees…and for good reason. Retirement can last thirty years or longer, is the time of life when very expensive medical emergencies may strike or a sudden meltdown of the market could rob you of your financial resources. When you add in the uncertainties of the shrinking purchasing power of your fixed savings caused by inflation, rising property taxes, lower interest rates and your inability to work, it is easy to understand by Longevity Risk is top-of-mind for most retirees. Not much we can do about inflation and taxes except use our votes wisely to selecting honest, caring political representatives. Health can be controlled somewhat by eating right, exercising and not abusing our bodies by excessive smoking and drinking. Not much we can do about being excluded from the labor market nor can we control the economic cycles and interest rates. In fact about the only thing we can control for certain is how much risk we take with our retirement money.
If you have your retirement money in a risky place like the stock market and there is a meltdown, you’ll probably suffer a significant loss with no way and no time to make it up. In fact, if you lose your retirement money because you gambled in the market and lost, there will be no second chance…you’ll be dependent on the government, your children or a welfare organization. Not a pleasant thought and probably the main reason most retirees say living longer than their money is their number one fear. Unfortunately, far too many retirees have not taken steps to reduce their investment risks by heading for the safe places. Why is that?
First, you’re bombarded with advertisement, advice and promises that encourage you to keep your money in the market. You’re told that “longer term” you’ll do a lot better with stocks, bonds, mutual funds, diversified portfolios and other risky investments than if you keep your money in safe places like bank CDs, government bonds and fixed annuities. You’re presented with slick graphs and charts showing that here’s how much better you’ll do with your money at risk. The entire brokerage industry is dependent upon you to put your money at risk in the market and they’re working very hard to make sure you do. You can’t read a newspaper personal advice column, watch the news or read any of the thousands of magazines or newsletter devoted to investing without being told you’ll be much better off by placing your retirement money with Wall Street for safe keeping. You’re never reminded of the market meltdown of 2000-2003 or the early 1970’s nor are you reminded that currently Wall Street is awash in losses from their profligate activities. The incessant calls from your broker are about how now is the time to buy at bargain prices. What about the losses you already have? You’re scared into believing that unless you put your money at risk you’ll not make a reasonable return. In fact, you’re told that if you keep your money super safe you’ll realize your greatest fear of outliving your money. The truth is, you’re a lot more likely to outlive your money by taking risks you can’t afford than you are keeping it super safe and earning an interest rate that goes with safety. Remember that risk and reward are always traveling companions: if you have a chance to make a big return, it is certain that you are taking risks of loss. On the other hand, if you take zero risk of loss, your earnings will be positive and certain but not above market. So which do you prefer: the possibility of great growth but also the possibility of great losses OR absolute safety and a low but certain return? As Will Rogers once said, “I’m more interested in the return of my money than the return on my money”. I think Mr. Rogers had it right when it comes to the average retiree.
The current state of the economy is less than reassuring: unemployment is rising, dollar is very weak and falling, oil is teetering near $100 barrel, housing market is totally depressed, sub-prime credit problems are spilling over into autos and credit cards, inflation is heading higher and there is widespread talk of recession. The Federal Reserve — the nation’s guardian of monetary policy — is obviously scared stiff judging from the drastic moves they’ve made in recent weeks to rapidly force short-term interest rates into the basement. Most economists — including me — are skeptical that a nosedive of the economy can be avoided: recession is heading our way is what I see. Yet, you probably have most of your retirement assets in mutual funds [check your 401(k)], portfolios containing stocks and bonds and other risky investments. Have you forgotten what happened when the dot.com bubble burst? Have you thought about what you’d do if the market drops drastically? Do you realize you’ll not have a second chance if you lose too much of your retirement money? What can you do?
One option is to look into locking in a guaranteed lifetime income you can’t outlive. You see, there is insurance for longevity risk: insurance companies which are among the world’s largest, strongest and oldest financial institutions are willing to guarantee you a lifetime income you can’t outlive if you’ll deposit with them some of your retirement money. They will take the risk associated with the markets, stocks losing value, real estate crashing and other unforeseeable developments that can erase your retirement money. You’ll still be left with taxes, inflation, health issues and non-investment risks but you’ll not be able to outlive your money. How can insurance companies make such guarantees? The same way they are able to insure your home, car, health, life, business and other valuables: the law of large numbers and spreading the risks. If you live too long and they lose money on guaranteeing you a lifetime income there is someone else in your cohort group that didn’t live as long as they were expected. So, over time the numbers average out and the insurance company is able to manage the risk and make a profit. You, on the other hand, got protection from your most feared risk in retirement: outliving your money.
How do you find out more? Ask your financial advisor to talk to you about a guaranteed lifetime income secured by an insurance company. By the way, if your advisor starts talking about “variable annuities” tell him or her that you want something without risk: mention a fixed annuity without downside risk and one that allows you to start, stop or store your guaranteed lifetime income. You don’t have to give up control of your money to get a guaranteed lifetime income because in the past couple of years insurance companies have begun offering new products that specifically take care of longevity risk faced by retirees. These new plans allow you to change your mind if your circumstances change. Insist on flexibility and insist on no market risks. If you choose not to investigate this option but instead keep your retirement money exposed to the market, make sure you have a good answer for the following question: “What will you do if the worse case becomes a reality?”
Here are some links if you’re interested in finding out more about longevity risk and how to insure against it: