longevity risk
The risk of outliving one's retirement savings due to living longer than expected, making it the primary financial risk facing retirees.
Example
“With life expectancy reaching 90 for many retirees, longevity risk means planning for a 30+ year retirement.”
Memory Tip
LONGEVITY RISK = outliving your money. The longer you live, the more you need. Plan for 90+.
Why It Matters
Longevity risk is critical because it directly impacts how much money you need to save for retirement and how you should invest those savings. If you underestimate your lifespan, you may run out of money in your later years when you are least able to earn income, forcing difficult choices about healthcare and living standards.
Common Misconception
Many people assume that if they live to an average life expectancy age, they will be fine financially. However, average life expectancy masks the fact that many people live significantly longer, and you need to plan for the possibility of living well into your 90s or beyond to avoid financial hardship.
In Practice
Consider a 65-year-old who retires with 500,000 dollars and assumes they will live to 80. They might plan to spend 33,000 dollars per year. However, if they actually live to 95, they would need 1,000,000 dollars instead, creating a 500,000 dollar shortfall that could leave them unable to cover medical expenses or basic living costs in their final years.
Etymology
LONGEVITY (long life) RISK. The RISK of living TOO LONG relative to retirement savings.
Common Misspellings
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