February 25, 2021
After last year’s wild ride in the stock market, I know all of you who are near retirement or in retirement don’t need to be reminded that market risk can create problems for your long-term security.
But there’s another risk that you may be dangerously ignoring or underestimating. Research from the Center for Retirement Research at Boston College reports that retirees rank investment (market) risk as a bigger threat to their retirement security than longevity risk.
In reality, it’s longevity risk that's the bigger problem. Longevity risk is simply the chance that you may live a very long life—so long that you out-live your savings.
It’s a tricky concept to grapple with. After all, none of us can say for sure how long we will live. But what we can do is understand the chances of living a very long time.
The Social Security website has an easy-to-use free online calculator that will show you your life expectancy based on your current age, the age when you are eligible for full benefits (between 66 and 67), and your life expectancy at age 70.
Please pay close attention to what I am about to say: the age that pops up is not the age you should expect to die. It is the age where there is a 50% probability you will still be alive. That’s a very high probability of still being alive!
For example, a 65 year old woman today has a life expectancy of 86.6 years. That means she has a 50% chance she will still be alive at 86.6 years of age. The calculator says that if she is still alive at age 70 her life expectancy will be 87.6 years. Again, that means that if she is alive at age 70 she has a 50% chance of still being alive at nearly 88 years of age.
You can check your own personal life expectancy by going to the Social Security Life Expectancy Calculator.
Of course, your health status will play a role. But, if you don’t currently have a serious health issue, the average life expectancy estimates you will get from this calculator are important to think about.
If you’re like most people, you likely have been underestimating how long you might live. That is indeed a risk, as it may lead you to make financial decisions that aren’t in the best interests of a very much older you!
For instance, once you see your life expectancy, I hope you will be more open to following my advice to delay starting Social Security until age 70, if possible. The payout you get for waiting is much higher than what you get if you start drawing your benefit earlier. (The benefit for starting at age 62 is about 75% smaller than the benefit if you wait to start at age 70).