Simply put, a longevity risk is the risk of outliving your retirement savings. You can avoid this by making wise investments during your working years.
According to the American Academy of Actuaries, annuities and other risk-sharing options can help people save nearly 50% more than they would otherwise.
“It is significantly more cost efficient for a person to insure against longevity risk through a risk pooling arrangement, such as an annuity, than it is to self-insure that risk by attempting to manage a lump sum,” said Frank Todisco, senior pension fellow for the American Academy of Actuaries.
In a letter to the Treasury and Labor Departments, the organization recently outlined the benefits of this approach to retirement savings. The letter emphasized the importance of financial education as well as the lifetime income stream available through some annuities to mitigate longevity risk.
Although annuities can mitigate longevity risk, they do not provide funds for your survivors, unlike life insurance. This makes it an appealing option for those who do not have financially dependent beneficiaries or adequate retirement savings.
Longevity risk and how to avoid it don’t have to be frightening concepts. All you need to do is become financially educated and take advantage of all investment opportunities early in your working years to save for retirement.