June 29, 2023

Longevity Risk: Can You Outlive Your Social Security Benefits?

Longevity risk is a significant concern for high-net-worth individuals nearing retirement age, as it involves not properly calculating any savings you may have accumulated and planning accordingly. Fortunately, this risk can be managed. By incorporating the right strategies, you can aim to ensure you have enough income to support your lifestyle and maintain your financial goals, regardless of how long you live. 

What is Longevity Risk?

Longevity risk and retirement savings are common issues among retirees. Longevity risk is the possibility of outliving retirement savings or income sources, or incorrectly calculating how much savings you will need. This risk can occur in multiple ways, including outliving your savings or dying earlier than you may have calculated. As such, you must make retirement planning decisions with longevity risk in mind, aiming to ensure that you can build multiple streams of income that can sustain you after you retire. 

Many financial challenges posed by longevity risks are a result of inflation. Inflation eats at the value of your retirement savings and may result in an inability to have income sources to maintain your desired lifestyle. As such, you must make any retirement investments with inflation in mind, aiming to ensure that your investments will provide you with the financial means to manage the declining value of money. 

Longevity risk is often a result of inadequate financial planning. This lack of planning can take many forms, including failing to save enough for retirement, inadequately diversifying retirement savings, or not accounting adequately for inflation when making retirement planning decisions. High-net-worth individuals must make retirement decisions with these considerations in mind.

Fortunately, high-net-worth individuals can aim to reduce this risk by accumulating retirement savings and planning appropriately. Expert assistance from a planner working with high-net-worth individuals can help you develop a retirement plan considering multiple potential income streams. 

How Does Longevity Risk Affect Your Retirement Savings?

The average American is living longer today than they were a decade ago. This new reality is obviously wonderful news. However, adjusting to increasing lifespans also means managing and mitigating longevity risk. The longer you live, the more likely you will outlive your savings. With lifespans likely increasing, you should adjust your retirement strategies and social security planning to incorporate longer ones. 

Second, there are important expenses to consider. For example, many individuals fail to plan adequately:

  • Rising costs and an increase in healthcare expenses
  • The need to enroll in long-term care, either at home or in some type of assisted living facility
  • Reconstruction of your home may be necessary due to the physical limitations that come with age

If you are a high-net-worth individual, you can find retirement planning professionals who understand how changing longevity risks affect your retirement savings. This may include developing alternative retirement strategies, maximizing social security benefits, and developing investment strategies to ensure long-term financial health. It also means creating a strategy that is customized to your specific needs. 

Retirement Benefits Considerations

Social Security benefits are guaranteed to any American who has paid into the system, and you cannot outlive your social security benefits. You will receive benefits until the day you die, and your benefits that will increase with inflation, ensuring that you will have at least one source of income that will increase with inflation. 

That being said, inflation can reduce the value of other income sources, including fixed pensions, savings, annuities, or other stock investments. Inflation and increasing life expectancy mean that the value of other sources of income may decline substantially over time. 

This begs a critical question: What investment and retirement drawdown strategies can you incorporate to mitigate longevity risk and reduce the chances of you outliving your assets? If you are a high-net-worth individual, how can you maintain investment strategies that will adjust to inflation and ensure you can maintain a desired lifestyle? How can you ensure your wealth will transfer to your survivors if you die sooner than expected? 

Follow the 4% Rule

The 4% rule is a withdrawal strategy that allows you to aim to maximize the longevity of your retirement savings while also giving you flexibility. People use it to make their savings last as long as possible.

The rule is relatively simple: Once you retire, you withdraw 4% of your retirement balances but then make additional withdrawals based on the inflation rate. Here’s an example: Suppose you have $1 million saved for retirement, and inflation is non-existent. In your first year of retirement, you will withdraw $40,000. Let’s say that the inflation rate next year is 5%. You could make a withdrawal of $42,000.

While it helps you maximize your savings, the challenge with the 4% rule is that it doesn’t eliminate the risk of you outliving them entirely, particularly if your investments were performing poorly or inflation was high. 

Delay claiming your Social Security benefits

From a social security timing perspective, remember that you only get your full social security benefit if you delay claiming your social security benefit until age 70. Waiting until you are 70 allows you to get the highest possible benefit, enabling you to maximize your investment in the social security system.

For most individuals, waiting as long as possible to collect their benefits allows them to get the highest return on their investment in social security. 

Invest strategically

Developing a good investment strategy for retirement is not simply throwing money into a savings account and hoping for the best. Instead, you must have a well-diversified investment portfolio. This can include full-invested solutions that aim to take advantage of market growth and tactical strategies that aim to protect you in down markets. You must also aim to ensure the investment plan you and your financial advisor develop can meet your short and long-term retirement goals. 

You will also need to make demands that are as tax efficient as possible. As you likely know, Individual Retirement Accounts (IRAs) have certain tax advantages. Depending on the type of IRA you enroll in, you can make contributions or take tax-free withdrawals. The investments will also be able to grow tax-free. As a result, these retirement products are typically well worth investing in from a tax and retirement perspective. The challenge will be selecting an IRA with tax benefits that are appropriate for you and determining which IRA to max out first. 

As a high-net-worth individual, you may be able to take advantage of your 401k at your place of work. Your workplace’s matching contributions to a 401k can be an invaluable strategic investment. You would then want to work with your financial advisor to ensure that the investments made by your 401k were in line with your overall financial planning and social security timing considerations. 

Mitigate Longevity Risk with Churchill Management Group

Mitigating your longevity risk isn’t easy. It requires planning, a robust understanding of your available resources, and expert advice. At Churchill Management Group, we have extensive experience working with high-net-worth individuals — like you — to help you identify your financial goals and determine the best plan to meet your financial needs. 

Ready to take your next steps? Schedule a consultation with the Churchill Management Group today, and learn more about how we can help you plan for your retirement. 

Financial Planning Services

Churchill provides financial planning services to Clients that specifically engage Churchill for that service. The planning can include defining goals, designing a plan, assisting with implementing the plan, and evaluating and adjusting the plan over time, at the request of the client. The financial planning includes advice regarding securities investing, and may include discussions of a client’s tax, insurance, employee benefits, estate planning and other issues. Churchill, however, does not provide legal, insurance, employee benefit, estate planning, tax or accounting advice, and the client must rely on legal, insurance and accounting professionals for that advice and documentation.

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