What is Longevity Risk?

What the heck is Longevity Risk?

Why does it affect me? To put it simply, Longevity Risk is a new concept that addresses the issue of ensuring people do not outlive their money. Many financial professionals have made it a practice to ensure clients do not outlast their retirement investments, but now this NEW term has come to the surface. But with the average life span on the rise, this can certainly be a concern.

To help with the Longevity Risk, federal employees can use the Thrift Saving Plan (TSP), G Fund to grow monies throughout their working career. But many still wonder if its ENOUGH for their entire remaining life.

For non-federal employees the idea of a pension program is nearly non-existent. To those same Americans the concept of accumulation of funds beyond Social Security is mostly a dream. For a federal employee the concern is entirely different. The G Fund was designed to ensure a steady return without the exposure to market risks. However; the perpetual low returns cause many professionals to worry that there will not be enough money to last their client’s lifetime.

In 2011 the General Accounting Office published a document “Ensuring Income throughout Retirement Requires Difficult Choices.” This publication covered the use of annuities, which many people have never even considered. In part because they do not understand them and people shy away from anything insurance related. However, annuities offer guarantees which investments cannot provide. Responsible retirement professionals must, as some point, ensure clients will not outlive their money, rather than trying to make as much money as possible while exposing a client to volatility risk.

In retirement it is more important to ensure there is guaranteed funds unto death rather than the thought of going broke before death. While savings are important and necessary for a comfortable retirement, the annuities offer even more stability when facing the “Longevity Risk”.