Most advisors talk about the “4% rule” when it comes to retirement withdrawals. But living longer than expected can make this approach risky. This is what’s known as longevity risk in retirement—the danger of outliving your money.
What Is Longevity Risk?
Longevity risk means you may live much longer than your savings were designed to last.
A quick look at history shows how much things have changed:
- In 1900, life expectancy for men was only 46
- By 1936, it had already risen to 62
- Today, nearly half of healthy 65-year-old couples will see one spouse live to at least 98
That means retirement could last 30 years or more. If your income plan only works for 20 years, you could run out of money.
Why Systematic Withdrawals Fall Short
A systematic withdrawal plan (SWP) is based on the idea of taking out a set percentage of your portfolio each year. Traditionally, this has been tied to the “4% rule.”
But there are problems:
- The 4% rule was only an estimate from the 1990s
- Today’s research suggests a safer rate is closer to 3%
- Market losses early in retirement can quickly drain savings
- You don’t know how long you’ll need the money to last
The Constrained Investor Problem
Many retirees fall into the category of constrained investors. These are people who saved responsibly, but still need to take more than 4% a year from their portfolio to fund their lifestyle.
This group faces the highest risk of running out of money because withdrawals may outpace returns.
How Longevity Risk Plays Out in Real Numbers
Let’s look at an example. Suppose a 65-year-old couple needs $40,000 per year on top of Social Security.
- An annuity could provide that $40,000 income for life with about $570,000 of their savings.
- If they tried to cover the same $40,000 using $570,000 in a managed portfolio (with 1.5% annual fees), they would need an 8.4% return every year with no losses ever just to make the money last until age 100.
That’s simply not realistic. Even if they only planned to age 92, the returns needed would still be over 7.5% every single year—again, with no losses allowed.
| Age Planning To | Savings Needed | Required Annual Return | Risk |
| Age 92 | $570,000 | 7.6% (no losses) | Very high |
| Age 100 | $570,000 | 8.4% (no losses) | Nearly impossible |
Why Annuities Help Manage Longevity Risk
Annuities are not investments. They’re insurance products designed to transfer risk away from you. By pooling risk across thousands of policyholders, insurance companies can guarantee income for life—no matter how long you live.
Think of it this way:
- Withdrawals = Uncertainty. You’re guessing how long your money will last.
- Annuities = Certainty. You transfer the risk to guarantee the income.
A good analogy is installing a solar panel on your car for a cross-country trip. You don’t know how long the journey will take, but the solar panel keeps fueling the car no matter what. Annuities work the same way with retirement income.
Key Takeaways on Longevity Risk in Retirement
- People are living longer than ever—many well into their late 90s and beyond
- Systematic withdrawal plans are risky because no one knows how long retirement will last or what the returns will be
- Required returns to sustain withdrawals are often unrealistic
- Annuities can provide guaranteed income and remove longevity risk from your plan
Next Steps
Longevity risk in retirement is real, but you don’t have to gamble with your future.
If you’d like to see whether an annuity strategy could protect your income for life, I’d be glad to walk you through it.
- Schedule a short Zoom call to get your questions answered.
- Or, watch my video series 20% More Spendable Income in Retirement.
Your lifestyle depends on income—not on guesses. Let’s make sure it lasts as long as you do.
All the best,Marty Becker
Podcast Episode 87: Longevity Risk Solved – Make Your Money Last for Life
Download Podcast Episode 87: Longevity Risk Solved – Make Your Money Last for Life on Apple Podcast