Planning for a shorter life expectancy risks outliving one’s savings. Planning for a longer life expectancy may mean spending less during retirement and leaving behind a larger than intended legacy. An Annuity can help mitigate both types of risk.
The longevity risk is the risk of outliving one’s life savings. Life expectancy in the U.S. has been consistently improving because of the improvements in health care. People were only expected to live up to 62 years back in 1935. Today, life expectancy is 76 for males and 81 for females. Females are expected to live 5 years longer than an average male. Couples will live even longer with one in four living past 90 and 1 in 10 past age 95. Life expectancy also improves by a year every decade.
The chart shows the survival probability of a 65-year old. The probability for living into the 90s is approximately 20%, 30% and 40% for males, females and at least one member of a couple respectively.
The longevity risk is different for individuals and institutions. Individuals only have one life and so, in this regard, this risk is solely their own. Hence, individuals are subject to idiosyncratic risk. Institutions, however, can pool the risk across a population and so only face systemic risk. This principle underpins how annuity products are priced. If you consider yourself as an individual with a better probability of survival due to personal health, family history, access to healthcare, etc., then you might come out ahead with an annuity investment. The different types of annuities are discussed in our blog “Annuity Product Types” and a walk through with an example investment is provided in “How An Annuity Works.”
We specialize in tax-free retirement strategy and investments such as IUL, Annuity and LTC. Prefer a quick and complimentary consultation? Just email us at Karthik@FinCrafters.com