Longevity Risk: Planning for a Long Life

Living longer than expected is a genuine financial risk in retirement, since savings calculated for a shorter life can run out while a retiree is still alive.

Most financial risks people plan for involve something going wrong - a market crash, a job loss, an unexpected expense. Longevity risk is stranger: it’s the risk of something going right. Specifically, it’s the financial danger that a retiree lives longer than their savings were planned to last, turning a long, healthy life into a source of financial stress rather than pure good fortune.

Why “average” isn’t a safe number to plan around

Life expectancy - the average number of years a person is statistically expected to live from a given age - is a useful starting point for retirement planning, but it’s a dangerous number to plan around directly, because it’s an average, not a guarantee. Roughly half the people who reach a given age will live longer than their life expectancy at that age, some by a decade or more. A retirement plan built to exactly match average life expectancy has, by definition, a very large chance of running out before the retiree’s actual life does.

Planning for 85 when you live to 98

Imagine a 65-year-old retiree whose life expectancy, based on population averages, is 85 - so he plans his savings to comfortably last 20 years. He stays healthy and active, and lives to 98, thirteen years past his plan's assumption. If his savings were calculated precisely to run out at 85, he now faces over a decade of retirement with essentially no savings left, despite having planned responsibly according to what seemed like a reasonable estimate at the time.

Why this risk is hard to plan around individually

Longevity risk is especially tricky because no individual can know in advance which side of the average they’ll land on. Someone could do everything right - save diligently, invest sensibly, spend cautiously - and still face financial strain simply because they turned out to live an unusually long life, an outcome that’s genuinely good news in every sense except the financial one. This uncertainty is part of why financial advisors often recommend planning for a retirement noticeably longer than average life expectancy suggests, treating a long life as something to prepare for rather than something to hope doesn’t happen.

Tools designed to pool the risk away

Because longevity risk is largely unpredictable for any one person but fairly predictable across a large group, it’s well suited to being pooled, which is exactly what an annuity does. An annuity is a financial product where a retiree pays a sum upfront in exchange for guaranteed periodic payments for the rest of their life, no matter how long that turns out to be. Because the insurer issuing the annuity is paying out to a very large pool of people, some of whom will live shorter lives and some much longer, it can guarantee lifetime income to each individual by relying on the predictability of the group average, something no individual retiree can replicate alone with personal savings.

Treating a fixed withdrawal plan as risk-free

A common approach to retirement spending is a **safe withdrawal rate** - a percentage of savings, often cited around 4%, that a retiree withdraws each year with the goal of making the money last roughly 30 years. This guideline is a helpful starting point, but it was built around historical assumptions about market returns and a specific retirement length. Treating it as a guarantee, rather than a rule of thumb, ignores that a longer-than-planned life, unusually poor early investment returns, or higher-than-assumed inflation can each independently cause savings to run out faster than the rule anticipated.

Combining tools rather than relying on one

Because no single approach fully eliminates longevity risk, many retirees benefit from combining strategies: relying partly on lifetime income sources, like Social Security or an annuity, that can’t be outlived regardless of how long someone lives, while managing remaining savings with a flexible, regularly reviewed withdrawal plan rather than a rigid one set in stone at the very start of retirement. Building in this kind of margin turns longevity risk from a source of anxiety into simply one more factor accounted for in the plan.

Key takeaways

Longevity risk is the financial danger of outliving retirement savings by living longer than planned.
Life expectancy is an average, meaning roughly half of retirees will live longer than that figure suggests.
No individual can predict their own lifespan, making longevity risk hard to plan for alone with certainty.
Annuities pool longevity risk across many people, allowing guaranteed lifetime income for each individual.
Combining guaranteed lifetime income with a flexible withdrawal plan helps manage this risk more robustly than either alone.