When you reach your 60’s, as I have, you start taking a serious look at whether you are financially ready for retirement. As I talk with people about my own tentative plans, I frequently mention this concern: “What if I live to be 100?” Usually, people laugh.
I thought about that last week as I scanned a research report released last summer: “How Well Do Retirees Assess the Risks they Face in Retirement?” published by the Center for Retirement Research at Boston College. The research identified five major risks faced by retirees:
- Longevity Risk – risk of outliving your money
- Market Risk – market volatility
- Health Risk – unusually high medical or long-term care costs
- Family Risk – divorce, death of spouse, or needs of other family members
- Policy Risk – mostly related to changes in Social Security
The research results suggest that people are NOT very good at recognizing which risks pose the greatest threat to their retirement wellbeing. Objectively speaking, the greatest risks are (in order): 1) longevity; 2) health; and 3) market. But when people are surveyed, they focus their primary attention on market risk – the risks of ups and downs in the economy during their retirement, with longevity risk second.
The moral of the story? Don’t laugh at me when I ask “What if I live to be 100?”
Seriously: the report makes clear that the average person does not pay enough attention to longevity risk. To build a financially secure retirement, we need to be prepared for the possibility that we might live a long time. For those of us whose entire retirement income, apart from Social Security, is held in 401ks, IRAs, and other similar accounts: we need to be prepared to stretch that money for 30 or more years. Even for those of us who have IPERS or some other guaranteed lifelong pension: we need to consider the impact inflation will have on that income over 30 years or longer.
Longevity Illustrator. Several years ago I discovered this tool created by the Society of Actuaries. It shows us the statistical probability of living to different ages. As a female in my early 60s, it tells me I have a 45% chance of living to age 90, a 23% chance of living to age 95, and an 8% chance of living to 100. Yes, the odds of living to 100 are fairly small but there is almost a 50-50 chance I’ll live to 90. That means I need to be prepared to live at least to 90 or 95. And if I want to play it safe, maybe 100!
I’d encourage you to check out the longevity illustrator for yourself, and consider the information as you review your retirement plans!