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Retirement Planning Should Focus More on Longevity Risk

Longevity risk is one of the most important issues to contend with when you are retirement planning.  Some actuaries are worried that neither advisors nor their clients are taking longevity risk seriously enough.  In Think Advisor’s “The Actuaries: Longer Client Life Spans Require Big Shift by Advisors,” Savita Iyer-Ahrestani discusses the planning shift that actuaries suggest for advisors and their clients.  Any reputable advisor will take longevity into account when helping to make a financial plan.  But actuaries believe that there must be a greater focus on longevity and the risk that it puts on every part of a financial retirement plan.

Inflation could greatly hinder our purchasing power over the next three or four decades.   Only a small percentage of Americans receive income from defined benefit pensions.  Both the housing market and equity markets have taken large hits during the first 15 years of this century.  People are living longer and their life spans have to be carefully planned for.  There is a 30% chance that at least one person in a couple aged 65 will live until they are 95 and an 8% chance that at least one of them will live until they are 100.  As we live longer, we have to expect to work longer and even work during our “retirement.”  A lot of pressure is being placed on the Social Security and Medicare systems, something that the government is working to alleviate.  Those are even more reasons to take your retirement planning into your hands and ensure that you are financially protected.

It often takes a first hand experience with a family member or friend living until a ripe old age to make people appreciate the true possibility and implications of a long life.  There is a large focus right now on generating income to finance your retirement.  While creating an income stream is important, there are other phases of retirement that must also be planned for.  Retirement should be looked at more in phases of time rather than one simple time period.  The article suggests that people plan what they refer to as a life portfolio.  Know what you want to do in retirement; whether it be watching grandchildren, working part time, joining a tennis club or volunteering a few times a week.  The type of retirement lifestyle that you desire will also effect your financial planning, so it’s important to consider that as well.

According to this article, annuities are an important part of this financial planning.  Annuities are one of the most efficient products to help you deal with longevity risk.  The actuaries in the article stress that advisors, especially those who have ignored them in the past, really should consider annuity products for their clients.  They say that annuities are “crucial in managing longevity risk” because of the guaranteed stream of income they offer.  Using an annuity can help you eliminate longevity risk and live a more comfortable retirement.  The article also mentions that many Americans are forecasting a greater income need than they will actually have later in retirement.  Maybe we are too focused on accumulating more income, rather than making our income last longer.  The older you get, the less income you will need during retirement.  By purchasing an annuity to pay you guaranteed lifetime income, you will know the exact amount of income you will receive and can plan your retirement accordingly.

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