Simply defined, a longevity risk is to outlive your retirement savings. How you can avoid this is by investing wisely during your working years.
Annuities and other risk-pooling options may help people accumulate nearly 50 percent more savings, than they would otherwise, according to the American Academy of Actuaries.
“It is significantly more cost efficient for a person to insure against longevity risk through a risk pooling arrangement, such as an annuity, than it is to self-insure that risk by attempting to manage a lump sum,” said Frank Todisco, senior pension fellow for the American Academy of Actuaries.
The organization recently outlined the benefits of this approach to building up retirement savings, in a letter to the Departments of the Treasury and Labor. In addition to pointing out the lifetime income stream available through some annuities to counter longevity risk, the letter also stressed the importance of financial education.
Although annuities can combat longevity risk, unlike life insurance, annuities do not leave funds for your survivors. This makes it a good option for those without financially-dependent beneficiaries or sufficient retirement savings.
Longevity risk and how you can avoid it doesn’t have to be a scary thing. All you need to do is become financially educated and utilize all investment opportunities early in your working years and build up retirement savings.