Financial Corner: How Can You Help Lower Your Longevity Risk?

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The investment world contains different types of risk. Your stocks or stock-based mutual funds could lose value during periods of market volatility. The price of your bonds or bond funds could also decline, if new bonds are issued at higher interest rates. But have you ever thought about longevity risk?

Insurance companies and pension funds view longevity risk as the risk they incur when their assumptions about life expectancies and mortality rates are incorrect, leading to higher payout levels. But for you, as an individual investor, longevity risk is less technical and more emotional: it’s the risk of outliving your money.

Longevity RiskTo assess your own longevity risk, you’ll first want to make an educated guess about your life span, based on your health and family history. Plus, you’ve got some statistics to consider: Women who turned 65 in April of this year can expect to live, on average, until age 86.5; for men, the corresponding figure is 84, according to the Social Security Administration.

Once you have a reasonable estimate of the number of years that lie ahead, you’ll want to take steps to reduce your longevity risk. For starters, try to build your financial resources as much as possible, because the greater your level of assets, the lower the risk of outliving them. So, during your working years, keep contributing to your IRA and your 401(k) or similar employer-sponsored retirement plan.

Then, as you near retirement, you will need to do some planning. Specifically, you will need to compare your essential living expenses – mortgage/rent, utilities, food, clothing, etc. – with the amount of income you’ll get from guaranteed sources, such as Social Security or pensions. You do have some flexibility with this guaranteed income pool. For example, you can file for Social Security benefits as early as 62, but your monthly checks will then be reduced by about 30 percent from what you’d receive if you waited until your full retirement age, which is likely between 66 and 67.

You might also consider other investments that can provide you with a steady income stream. A financial professional can help you choose the income-producing investments that are appropriate for your needs and that fit well with the rest of your portfolio.   

After you’ve determined that your guaranteed income will be sufficient to meet your essential living expenses, have you eliminated longevity risk? Not necessarily – because “essential” expenses don’t include unexpected costs, of which there may be many, such as costly home maintenance, auto repairs and so on. And during your retirement years, you’ll always need to be aware of health care costs. If you have to dip into your guaranteed income sources to pay for these types of bills, you might increase the risk of outliving your money.

To avoid this scenario, you may want to establish a separate fund, possibly containing at least a year’s worth of living expenses, with the money held in cash or cash equivalents. This money won’t grow much, if at all, but it will be there for you when you need it.

With careful planning, adequate guaranteed income, a sufficient emergency fund and enough other investments to handle nonessential costs, you’ll be doing what you can to reduce your own longevity risk. And that may lead to a more enjoyable retirement.

Review John-Paul’s Financial Corner Articles:

“If anyone has any questions please reach out and use me as a resource. If anyone in this community wants to pick my brain or has concerns about what’s going on in the market, I’d would be happy to make myself available.”

Bio of Local Resident John-Paul:

John PaulHi, my name is John-Paul Tancona and I’m a financial advisor with Edward Jones. I have over 19 years of experience in this industry, working with both institutional and retail investors.

John PaulI earned my bachelor’s degree at Villanova University in 2000 and immediately started my years journey into the world of finance. My first 13 years were spent working at high profile wealth management firms covering large institutional investors. Recently, I joined Edward Jones and changed my focus to educating and empowering individual investors so they can achieve all of their financial goals.

We believe in working with investors one on one, either at your local Edward Jones office or conveniently at your kitchen table. We want to find out what is most important to you and your family so we can take you through our established process and partner together for life.

Whether you’re planning for retirement, saving for your children or grandchildren’s college education or just trying to protect the financial future of the ones you care for the most, we can work together to develop personalized solutions tailored specifically to help you achieve your goals.

I live in Sparta with my wife, Julieann, and two children: Dominic (10) and Daniel (7).

My branch office administrator, Ellen Hawkins, has 35 years of experience and is dedicated to offering you an ideal client experience.

I look forward to answering your financial questions and concerns. Please contact me to discuss your options so you can make informed decisions about your unique financial situation.   


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