March 20, 2023

Many Americans are living longer than expected. But there’s a difference between how long you’re likely to live, and the probability of living much longer. And if you’re unprepared, it can lead to financial regret.

Sometimes people claim Social Security too early, pass up opportunities to buy annuities or long-term care coverage, or simply under-save for added years of retirement. But when they realize this, it can be too late.

Actuaries and demographers distinguish between life expectancy and longevity. Life expectancy is the average number of years someone will live from a given age. Longevity is how long they might live if all goes well.

A growing body of evidence reveals ignorance about longevity risk – the probability of living a very long time – and its potential complications. In other words, you might live long, but your money might not. The numbers are a bit frightening.

Social Security and personal savings are ideal for retirement income. Yet many people outlive their personal savings and rely solely on Social Security. Among those aged 65-69, 18% receive more 90% of their income from Social Security. By age 80, it’s up to 33%.

A big issue is bridging the gap between savings and Social Security. We encourage retired couples to delay claiming the highest earner’s Social Security benefits as long as possible. To do that, there must be other income (often personal savings). Annuities can help, but many people don’t take advantage of these products for various reasons.

Without income to supplement Social Security benefits, bridging the gap is impossible. Then retirees are forced to turn to Social Security exclusively. But if these benefits are claimed too early and you live longer than anticipated (i.e., longevity risk), it could present an insurmountable income shortfall.

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