What You Need To Know About Longevity Risk

When it comes to retirement planning, health, and longevity risk, one of the biggest risks facing retirees is outliving their savings. This is what is known as longevity risk.  Thanks to many factors, including advancements in medicine, healthcare, healthy living practices, and hygiene (to name a few), people are living a lot longer. In fact, over the last 200 years, the life expectancy of humans has more than doubled. Consequently, retirees may face a risk that they will live longer than their savings will allow them to draw income.

What Is Longevity Risk?

Longevity risk is the term used to define the possibility that your investment capital, retirement savings, or annuities will not last as long as you do.  It is becoming increasingly common for people to underestimate how long they actually live, so building realistic life expectancy assumptions into your retirement planning is essential. Nevertheless, longevity risk can be mitigated to a certain extent through effective planning, which can provide greater peace of mind to retirees.

Longevity Risk Management: How to Mitigate Longevity Risk

Rising life expectancies and changing mortality rates have made longevity increasingly difficult to predict. These factors result in the requirement for greater-than-expected retirement plan payouts spread over a longer period of time than you had initially anticipated.  Pension plans with guaranteed lifetime benefits and annuities are particularly susceptible to longevity risks. By incorporating a longevity risk plan into your current retirement plan, you can take a step towards ensuring that you don’t outlive your savings. Longevity risk and retirement savings require more planning than in the past.

How To Manage Longevity Risk and Retirement Savings

Longevity risk and retirement income planning are crucial considerations. Your ultimate retirement goal is likely to attain a comfortable standard of living when your golden years arrive. However, longevity risk can affect anyone, which is why retirement planning is so important. Your retirement income needs to be able to sustain you, and possibly even your spouse and dependents, until your passing. Your retirement plan will also need to be frequently reviewed to mitigate the effects of longevity risk, protect your retirement income, and ensure that you can sustain your way of life in your old age.  A financial advisor can help make sure that your retirement plan is put together with suitable products that mitigate risk and protect your wealth. 

Longevity Risk Management: The Role of Longevity Swaps

A longevity swap is an essential tool for managing longevity risk, particularly for defined benefit pension plans. This financial structure allows the plan sponsor to transfer the risk associated with members living longer than expected to an insurer or another financial entity. In this transaction, the pension plan pays a predetermined monthly amount to the insurer based on estimated liabilities. In return, the insurer covers the actual payments to retirees, thus providing security against the increasing liability due to extended lifespans.

Employed significantly in the UK since 2019, longevity swaps have emerged as one of the most effective options for plans exposed to mortality risk. By transferring a portion of the income liability to a third party, plan sponsors can better manage their financial commitments, ensuring retirees receive their entitled benefits without overextending the fund’s resources. This approach not only offers a practical solution to longevity risk but also contributes to the stability and predictability of retirement income planning.

At Nour Private Wealth (NPW), we understand that navigating and managing the financial implications of your retirement can be complex, especially for high-net-worth individuals. Our carefully crafted strategies mean that we can recommend the best retirement planning strategies and products to suit your individual circumstances, keeping in mind your income tax, investments, estate, and cash flow planning situations. We are also knowledgeable and experienced enough to help you determine the right choices for your retirement plans, including lump sum payouts vs. annuities and joint survivor vs. single-life distribution arrangements. 

Contact us today to learn more about how we can help you attain a comfortable retirement free of financial worries by understanding longevity risk.

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