Solving Longevity Risk in Retirement

The Decumulation Dilemma

The transition from your working years to retirement introduces a significant wild card: time. While the accumulation phase of retirement planning is oriented around your target retirement date, your decumulation—the spending down of your retirement assets—requires financial planners to work backwards from a lifespan estimate. Throw in further uncertainty around market volatility and inflation, and it’s clear that withdrawal rates are often predicated on assumptions that may not pan out. 

To introduce some certainty to the process, one option is to supplement portfolio withdrawals with a source of guaranteed lifetime income: Annuities. As lifespans get longer, income annuities are gaining new traction as a cost-effective hedge against the worst-case scenario of having to rely solely on Social Security towards the end of your life. 

An annuity also reduces your reliance on portfolio withdrawals for retirement income, which is especially important during market downturns. And because it’s a stable, uncorrelated income stream, it reduces overall portfolio risk, which in turn allows you to increase your equity allocation. 

Some pre-retirees may question having a substantial amount of their portfolio still in equities during retirement. But in an age of lengthening lifespans and unpredictable inflation, a more aggressive allocation can give you the growth you need to offset longevity and inflation risk. 

The Costs of Aging

A longer life doesn’t just mean more years of decumulation. It also means a greater likelihood of developing age-related health conditions, and the costs that come along with them. 

New York Life research shows that annual health care expenses increase significantly the longer you live, and the likelihood of needing long-term care rises as you get deeper into your 80s: more than half of all residents of care facilities are over the age of 85, according to a 2024 National Center for Health Statistics report³. And this care doesn’t come cheap: New York Life’s cost of care survey estimated that three years of long-term care followed by two years in a nursing home adds up to $365,000 in costs. As Medicare doesn’t cover non-medical long-term care costs, these expenses need to be figured into your plan, either through increased savings or insurance solutions. Otherwise, the responsibility for your care may fall to your family.

If the age-related condition includes cognitive decline, it can also bring secondary costs in the form of impacted financial decision-making. In fact, research published by the Federal Reserve in 2020 found that Medicare patients who developed dementia saw their credit scores begin declining two-and-a-half years before their diagnosis⁴. That’s why it’s a good idea to establish powers of attorney and other legal instruments to ensure your wishes are carried out and your finances are in trustworthy hands. 

But preparing for longevity and its related risks goes beyond just financial and legal solutions. It’s also about the decisions you make about where and how you’ll live in your later years. At a minimum, this means ensuring your home is safe and accessible, but it’s also about staying connected to your community—friends, family, and other loved ones—into your later years. Decades of research point to the quality of our relationships as the strongest predictor of a long, healthy and fulfilling life. 

While everyone wants to live a long life, no one wants to run out of money or become a burden on their family. But there are moves you can start making today to prepare, including building guaranteed income into your retirement plan, insuring against age-related care costs, and taking steps to protect against cognitive decline. With proper planning, you can see longevity not as a risk, but as a gift.