FEDweek

Treating Longevity Risk as a Real Concern

Although the term “longevity risk” has been growing in use, it still hasn’t reached the level of understanding it warrants since it is as much a risk for retirees as inflation and mismanagement of investments and spending, according to a report by organizations of actuaries from several countries including the U.S.

Longevity risk is the extent to which an individual’s life span significantly exceeds his or her life expectancy and “the financial cost of longevity risk is that either individuals will outlive their retirement savings or alternatively, they will underspend their savings, leading to a lower income over retirement and an unintentional bequest on death.

“With rising life expectancy, saving sufficiently for an adequate income in retirement is increasingly important. This is compounded further still as there has been a shift away from defined benefit pensions in favor of defined contribution plans. This shift is transferring responsibility for managing longevity risk—alongside investment and inflation risk— to the individual,” it said.

Older persons tend to underestimate their life expectancies and would benefit from better information about the probability that they, and financial dependents, will live to various ages apart from average life expectancy, it said.

They further tend not to protect themselves by buying financial products such as personal annuities, it said. “Such products would in the latter years provide a lifetime income guarantee to protect against longevity risk.”