Longevity risk is the chance of living longer than expected, but what happens when we are expected to live shorter than planned? Most don’t see this as a risk simply because passing away with money on the table does not seem as dangerous as living beyond what’s there, but there may be some things you will want to consider if in fact you ARE expected to live shorter than planned.
Last week I talked about the implications of underestimating our life expectancy, and how we can adjust our plans accordingly. This week I’ll take on the other side of the discussion and look at the implications of overestimating our life expectancy, and how we can adjust our plans accordingly.
Run a projection
As a reminder, the first thing you will want to do is run a life expectancy projection to see if you are at risk or either overestimating or underestimating how long you will live. If you have already made a fairly accurate (within a few years) estimate of your life expectancy and have already factored that into your retirement plans, then you are already in good shape and probably don’t have a high level of longevity risk. If you are expected to live LONGER than planned, refer to my prior blog post. If you are expected to live SHORTER than planned, keep reading.
Adjust your plans
The first thing you will want to do is throw a HUGE retirement party (just kidding!).
The first thing you’ll want to do is consider how a shorter life expectancy may affect you and the people around you. Do others depend on you for income? Will there be outstanding debt? Are there things in life that you would like to do but can’t because of the constraints of work? Here is what you can do if longevity is not a concern:
1. Rethink your planned retirement age.
If you are planning to live until 90, only to find out you are projected to live until 75, working until 70 may not leave enough time to enjoy the retirement you are looking forward to. Plus, many will leave the workforce unexpectedly due to health problems, disability, or changes with the employer. It’s okay to be willing to work longer, but adjust your plan for the possibility of retiring younger.
2. Evaluate your need for life insurance.
A few years ago, my neighbor passed away unexpectedly, and his widow was left with a sizable mortgage. If you’ve recently taken advantage of low mortgage rates by refinancing into a 15- or 30-year mortgage, consider a term life insurance policy that takes care of paying off the mortgage should you pass away earlier than expected.
3. Plan on taking Social Security benefits earlier (but not too early).
You may begin collecting Social Security benefits as early as age 62, although taking benefits before your full retirement age will reduce the level of benefit you are entitled to receive. Run a projection of your Social Security benefits to see the impact of collecting your benefits at a younger age.
4. If you are eligible for a pension benefit, consider taking it as a lump sum (if available).
Annuity payments are calculated over an average life expectancy, so if your life expectancy is shorter than average, the lump sum option may have more value.
One thing to keep in mind is that we don’t want to overcompensate for the possibility of a shorter life expectancy. After all, even scientific calculations have a probability of error. Don’t plan on spending your last dime on your 85th birthday just because that’s the age you are projected to live to. Be sure to have a backup plan in place, which may include downsizing your home, relocating, or even building in an inheritance that can support you if needed should you live longer than projected.
In case you are wondering, my life expectancy is 86, which is actually longer than I expected. The bigger question is what is yours? Run the numbers, and adjust your plans accordingly. Then you’ll have at least one less thing to worry about, which may actually help you live longer.