Longevity Planning Financial Strategies
You need to consider Longevity Planning prior to retirement. What is longevity planning? I’m glad you asked!
We all know the greatest fear in retirement is running out of money. Obviously the longer you live, the greater the chance you run out of money. In fact, longevity risk is the main risk in retirement, as longevity is the great multiplier of risk: all risks are worse with longevity.
Longevity planning is not a product. Longevity planning encompasses wellness, accessible housing, planning for cognitive decline, healthcare and many other non-financial considerations. I like to focus on financial strategies so we will discuss the financial aspects of longevity planning.
What is longevity planning? Let’s start with a definition.
What is Longevity Planning?
Longevity planning is not a product. It is the acknowledgment that when you live a long time, all other retirement risks increase! From a purely financial standpoint, the longer you live, the more assets are required to take on those risks.
Longevity planning begins with social security planning. Social security is the simplest first step to ensure adequate resources if you should live a long life. No where else do you find a cost-of-living adjusted annuity with a government guarantee.
Social security optimization should be considered before before any withdrawal strategy or insurance product. Delaying social security is the most cost-effective way to guarantee an ongoing, cost of living adjusted stream of income that lasts as long as you do.
Beyond social security, withdrawal rate and product allocation must also be optimized for longevity. Here, you need to understand how withdrawal rate, sequence of return risk, asset allocation, and other products (such as life insurance an annuities) interact over decades of de-accumulation.
Next, you must consider your specific risks when thinking about longevity planning. For instance, the risk of long-term care increases with age and is a large concern for many. Long-Term Care planning is an important consideration, and may or may not include Long-Term Care insurance.
The bread and butter, however, of longevity planning is in fact annuities, which are insurance products. Don’t fear annuities when you retire! Just fear the complicated, expensive, advisor-sold annuities where you are not sure about the purpose of the money. We will discuss these annuities below.
So, in summary, what is longevity planning? Longevity planning involves organizing your assets such that you have money for the rest of your life! Even if you should live a long life.
When Should You Consider Longevity Planning?
If you have a family history of longevity, now is a good time to consider what you would do if you lived to be 100. Actually, the younger you are now, the earlier you should start to plan for longevity. Who know what medical advances we might see in the next decades?
Whenever you are considering retirement, the time is right to consider longevity planning. Specifically longevity planning is an important aspect of every retirement plan.
Why Longevity Planning?
This is the most important consideration: why do you need longevity planning?
Let’s think about this two ways.
If you are liability matching (which is also called bucketing, or time segmentation), it may be nice to plan to fund your retirement, say, before 85 and after 85. That is, you will assign your money different tasks: to fund your lifestyle before 85 and then after 85.
There are, of course, sources of income that will continue before and after this point, like social security, pensions, and annuities. But perhaps you have a bucket of money that will fund your needs before 85.
Then, when you turn 85, a DIA and a QLAC kick in that fund the rest of your life. How nice is it to know you have pot of money to blow before you turned 85? And then income turns on when you are 85 to provide a further life-long stream.
Conversely, you could plan on the retirement spending smile. Here, you know that spending decreases over time until it starts increasing again (due to medical and frailty expenses) later in life. If you are worried about affording risks later in life, you could add on some retirement income that kicks on later in life or Long-Term Care Insurance to cover those expected expenses as they increase.
Why do you need longevity planning? In case you live a long life! After all, if you die early, you will still succeed if you plan not to.
Longevity Risk: The Risk of Outliving your Assets
Again, the risk of longevity is that all your other retirement risks will be multiplied.
There are some products (longevity annuities) aimed specifically at the risk that you live a long life. I like to think of income annuities (SPIAs and the like) not as longevity annuities, as they are not focused on long-term (inflation-adjusted) income. Rather, longevity annuities provide money at a certain point in the future, and plan to meet inflation-linked targets.
There are many to address longevity risk. Let’s look at some products.
Back in 2016, Kitces predicted that longevity annuity would become a standard planning tool. While this is yet to happen, there is more and more academic research that points out that annuities do better for most folks than bond do. That is, you can use annuities as bond-replacement for a portion of the bonds in your asset allocation, and because of mortality credits, you have increased odds of success and may even leave more to your heirs. You need to invest in stocks and decrease your allocation in bonds as a result of the annuity.
Which annuities are longevity annuities?
Deferred income annuities are good annuities! That is: they are simple (not complex), inexpensive (not fee laden), and easy to shop for. All of this means that insurance salesmen don’t like to offer them, because they don’t make much money off them.
With a DIA, you take a lump sum of money and give it to the insurance company in exchange for future income stream. The longer you defer the payments, the more you get back in return.
Qualified Longevity Annuity Contracts are good annuities too! These are like DIAs in your 401k or IRA. They come with some extra whistles. Please read more about these products in order to understand them.
Longevity Insurance Calculators
How Much does Longevity Planning Cost?
Use the longevity planning calculators above to figure out how much, in general, longevity planning will cost. Note that the earlier you start, the lower the cost of planning for longevity!
Another way to consider this issue: longevity planning actually is retirement planning. Certainly you have to spend when you are younger, but the main goal of retirement planning is to be able to afford longevity. Thus the cost of longevity planning is actually the entire sum you devote to retirement!
What About Longevity Insurance for Your Parents?
If you are concerned that your parents may not have enough money to survive late retirement, there are also some interesting products to consider. Look at AgeUp.
Apparently, there are also products by MassMutual, Nationwide, BluePrint Income, and Kindur that allow you to purchase longevity insurance for your parents. Buyer beware, as I haven’t reviewed these products. The concept is interesting, though.
What are the Advantages of Longevity Planning?
The big advantage of longevity annuities is that they guarantees your income for life. You can buy annuities these (with different tax treatment) in your brokerage accounts or in your pre-tax retirement accounts. Another big advantage can be deferral of taxes until the income stream begins. This might allow some partial Roth conversions or other advanced planning strategies.
Also, there is no investment risk which can be huge for folks who are unable to tolerate any market volatility without losing sleep.
Finally, knowing you have a source of income that will kick in later allows you to spend your other sources of money more freely. Future money tree!
What are the Disadvantages?
Of course, there are tradeoffs as with any decision you make in retirement planning.
There is lower expected growth with these products than with 100% equities. Generally, these products are bond-alternatives rather than stock alternatives.
If you die early you lose the money. But that is why you get mortality credits and why these products are more efficient than buying bonds for your own portfolio.
Summary- What is Longevity Planning?
Don’t forget that delaying social security is the cheapest longevity insurance on the market. No other form should be considered until after you have optimized social security.
Most folks need to consider what will happen if they should live a long life. Longevity is the great risk multiplier. Think of every other retirement risk you have, and then double it because you live a few extra years.
It may be expensive to live a long life, but it is better than the alternative.