What If the Biggest Retirement Risk Is Living a Long Time?

Most people approaching retirement ask some version of the same question:

Do I have enough?

But there's another question hiding underneath it:

Enough for how long?

That's where retirement planning gets complicated.

None of us knows whether retirement will last 10 years, 20 years, 30 years or longer. Yet we're expected to take a lifetime of accumulated savings and somehow turn it into an income stream without knowing how many years that income must last.

That's a problem investments alone can't completely solve.

The Problem With "Just Don't Run Out"

Suppose you're 65.

You could build a retirement plan assuming you'll live to 85. But what happens if you live to 95?

So perhaps you plan to 95.

But what if you live to 100?

The more years we add to the plan, the more conservatively we generally have to spend today.

Retirement researcher Wade Pfau calls attention to this problem in his work on retirement income.

A retiree attempting to "self-annuitize" has to prepare for the possibility of an unusually long life. That usually means doing one of two things:

Spend less or take more investment risk.

Neither choice is particularly appealing.

Insurance Can Do Something Investments Can't

This is where an income annuity becomes interesting.

An insurance company doesn't have to know exactly how long you will live.

It needs to estimate how long thousands of people will live.

Some people in that group will die earlier than expected. Others will live considerably longer. By pooling those risks, an insurance company can contractually continue payments to people who live much longer than average.

This produces something known as a mortality credit.

It's one reason lifetime-income annuities shouldn't simply be compared with the interest rate on a CD or the expected return of an investment portfolio.

You're purchasing something fundamentally different:

insurance against living too long for your money.

Then Why Not Put Everything Into an Annuity?

Because retirement has other objectives.

You need liquidity.

You may want money available for children or charities.

You need growth to help combat inflation.

You may have unexpected expenses.

And you may simply value having control over your assets.

That's why we believe the better conversation usually isn't annuities versus investments.

It's annuities and investments — each doing the job they're best equipped to do.

A portion of retirement assets might provide guaranteed lifetime income.

Another portion can remain invested for growth, inflation protection, liquidity and legacy.

The appropriate balance will be different for every family.

There Is More Than One Way to Create Lifetime Income

A traditional income annuity is the simplest example. You give an insurance company a portion of your assets and, in return, it promises an income stream that can continue for the rest of your life.

Another approach uses a deferred annuity — including certain fixed indexed annuities — with a lifetime-income benefit.

In this structure, there can still be an account value. But an additional contractual benefit establishes an amount that can be withdrawn for life, subject to the terms of the contract. Even if permitted lifetime withdrawals eventually exhaust the account value, the insurance company's contractual income payments can continue.

That distinction can be valuable for someone who wants both lifetime-income protection and some degree of liquidity or potential value for beneficiaries.

There are costs and tradeoffs for those additional benefits, which is why the details of the contract matter.

Retirement Isn't Just About Maximizing Return

This may be the most important point.

An investment that produces the highest return isn't necessarily the tool that creates the best retirement.

Retirement planning has a different objective.

We're trying to create a dependable lifestyle from assets that must support an unknown lifespan through unpredictable markets and inflation.

Research into retirement-income strategies has increasingly examined combinations of investments and lifetime-income guarantees rather than assuming a traditional stock-and-bond portfolio must do every job.

That makes sense to us.

Stocks are exceptionally useful for long-term growth.

Insurance is exceptionally useful for transferring risks that an individual cannot efficiently bear alone.

Longevity is one of those risks.

A Different Way to Define Retirement Success

At Epiphany Financial Coaching, we don't think retirement success should simply mean:

"You didn't run out of money."

That's setting the bar awfully low.

We would rather ask:

Can you live in the future like you live today, adjusted for inflation, without running out of money?

Sometimes investments alone can accomplish that.

Sometimes existing Social Security and pension benefits provide enough guaranteed income that additional insurance isn't necessary.

And sometimes using a portion of accumulated wealth to create additional guaranteed lifetime income can make the overall retirement strategy stronger.

The answer isn't the same for everyone.

But we believe the question deserves to be asked.

Because the purpose of retirement planning isn't simply to accumulate the most money.

It's to turn the money you've accumulated into a life you can actually afford to live.