Plan for a Longer Lifespan

Among the many perils facing today’s workers and retirees, four in particular stand out: longevity risk, inflation, market volatility, and abandonment risk. I wrote a post on this topic in June.

In this post, I’ll take a closer look at longevity risk — one of the most common retirement concerns. In fact, the risk of outliving their savings is a worry that keeps about one-third of workers and retirees awake at night, according to the Principal Financial Well-Being IndexSM (third quarter 2011).

They’re worried for good reason. Many people underestimate their lifespan, which is six years longer on average today than it was when Social Security was created. This is according to Risky Business: Living Longer Without Income for Life, a June 2013 study from the American Academy of Actuaries’ Lifetime Income Risk Joint Task Force. (For those interested, you can check out the report.)

That may not seem like much, but consider, as the actuaries point out, a male who lives to age 65 has a 60% chance of reaching age 80 and a 40% chance of living to age 85. Females face even greater longevity risk. A woman who reaches age 65 has a:

  • 71% chance of living to age 80.
  • 53% chance of living to age 85.
  • 31% chance of living to age 90.

That’s potentially 20 to 25 years in retirement. Coupled with low savings rates among most investors, that puts many at risk of outliving their savings.

How can investors combat this risk? For starters, they should calculate how much they’ll need to set aside for retirement and follow through by saving appropriately.

Another way to help overcome longevity risk is with a diverse mix of investment strategies that are based upon their risk tolerance. Options could include dividend-paying stocks (including real estate investment trusts (REITs) and master limited partnerships (MLPs)), high yield, emerging market debt, and preferred securities.

A meeting with a financial professional is a great way to start the conversation.

Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc.

Asset allocation/diversification does not guarantee a profit or protect against a loss.

Fixed-income investment options are subject to interest rate risk, and their value will decline as interest rates rise. Lower-rated securities are subject to additional credit and default risks. International investing involves increased risks due to currency fluctuations, political or social instability, and differences in accounting standards. REIT securities are subject to risk factors associated with the real estate industry and tax factors of REIT registration.

A master limited partnership (MLP) that invests in a particular industry (e.g., oil and gas) may be harmed by detrimental economic events within that industry. As partnerships, MLPs may be subject to less regulation (and less protection for investors) under state laws than corporations. In addition, MLPs may be subject to state taxation in certain jurisdictions, which may reduce the amount of income paid by an MLP to its investors.

Risks associated with preferred securities differ from risks inherent with other investments. In particular, in the event of bankruptcy, a company’s preferred securities are senior to common stock but subordinated to all other types of corporate debt.