Longevity Risk
The risk of outliving one's retirement savings due to a longer-than-expected lifespan.
What is Longevity Risk?
Longevity risk is the financial risk that an individual, pension fund, or insurance company faces if beneficiaries live longer than anticipated, depleting assets before death. For individual retirees, longevity risk means outliving savings — a growing threat as life expectancies rise. A 65-year-old American today has roughly a 50% probability of living past 85 and a 25% probability of reaching 92. Mitigating longevity risk involves strategies such as delaying Social Security to maximize lifetime benefits, purchasing lifetime income annuities, maintaining a growth-oriented investment allocation well into retirement, and conservative withdrawal rates. For pension funds and insurers, longevity risk is managed through longevity swaps, reinsurance, and actuarial reserving.
Example
A retiree who withdraws $80,000 per year from a $1 million portfolio (an 8% withdrawal rate) may run out of money in 15–17 years — before age 82 if she retires at 65. With a 25% probability of living to 92, this represents significant longevity risk. Reducing withdrawals to $40,000 (a 4% rate) and supplementing with delayed Social Security reduces the probability of portfolio depletion to under 5% in historical simulations.
Source: Social Security Administration — Actuarial Life Table