When you hear your financial advisor mention “risk of longevity,” what exactly are we talking about here at JG Financial Consulting? Longevity refers to “long life” or “length of life.” Simply put, longevity risk is the risk that someone will outlive their wealth and available income.
It’s a fact that people are living longer. Not only has the average life expectancy increased, but one out of every four 65-year-olds living today will live past the age of 90. One out of 10 will live past 95–the number of people living to age 100 increased more than 43% from 2000 to 2014!
From a financial point of view, living a long time can drastically affect many of your retirement costs, impacting and presenting a “risk” to many different items in your budget—right when you will be living on a fixed income.
Let’s examine some of the issues affected by longevity:
- Health Care
Health care expenses are a huge chunk of any retirement budget—even with Medicare. A healthy 65-year-old couple can expect to spend approximately $266,589 to cover health care expenses not covered by Medicare Part A during their retirement for Medicare Parts B, D and a supplemental insurance policy (sometimes called Part C). This assumes at least one of them worked and paid Medicare taxes and so their Medicare Part A premiums are covered.
And that total doesn’t even include dental, vision, co-pays, deductibles and out-of-pockets. When you add those in, a couple’s costs rise to $394,954 throughout retirement. Living longer not only increases yearly health care outlays, but your chances of developing a serious health issue increase as you get older.
Your odds of becoming incapacitated also increase with age, which could lead to the need for nursing care. In fact, 70% of people over 65 end will up needing some form of assistance. The average yearly cost of a semi-private room in a nursing facility is $80,300.
Yes, you can qualify for Medicaid to cover your nursing home stay—if you spend down all of your assets to poverty level. There are options to this scenario that you definitely want to consider.
Prices will continue to get higher through the years—in fact, inflation is part of the Federal Reserve’s monetary policy. Inflation undermines your purchasing power over time. While it’s true that if the Consumer Price Index (CPI) rises in a given year, retirees sometimes get a COLA (Cost-of-Living Adjustment) increase on their Social Security benefit check, you’d best not count on that. For the last few years, there has been no COLA, primarily because of low oil/gasoline prices. It goes without saying that the longer you live, the more you will spend on consumer goods and living expenses.
- Excess Withdrawal / Inadequate Income
If your portfolio isn’t structured properly to provide enough income for a long life, you really are at risk of running out of money. Unexpected family expenses or needing to withdraw money during a market downturn can affect your nest egg negatively for the long term (kind of like compound interest in reverse). The death of a spouse is also a risk to your income, as Social Security benefits will likely decrease and taxes will increase due to fewer household exemptions.
The point of this article is not to inspire fear, but to inspire early, realistic retirement planning. Don’t worry about the future–let’s make some solid plans!