Your Longevity Compounds the Inflation Risk of Your Retirement Income

Charles Helme |

It has only been since the Baby Boomer generation began to cross the retirement threshold that we’ve had to seriously confront the new challenge of our longevity. Although most of us are now bracing for the probability of living 20 to 30 years in retirement (nearly double the retirement life spans of our grandparents), what isn’t quite as clear is that our actual longevity is a moving target. That is, the older we get, our life expectancy increases, and that can have serious implications for the way we plan for our retirement income.

The life expectancy chart today would show that a 60-year old male should expect to live until age 81; however, when that same male reaches age 65, he can be expected to live until age 85. When he reaches age 70, he will have a 20 percent chance of living to age 90, and a ten percent chance of living to 100.  To further compound the risks, women, who in some cases may not be as financially prepared, are twice as likely to outlive their husbands.

Now, when you layer the risk of inflation onto the risk of outlasting your income (longevity risk), the risks are drastically compounded. Previous generations only had to contend with inflation for 10 to 12 years. Our grandparents weren’t expected to live much beyond retirement (which is why Social Security seemed like such a good idea back in the 1930s).  Today, we need to contend with inflation for as many as 25 to 30 years. If the inflation rate were to average 4 percent, your purchasing power would be cut in half over the first 18 years of retirement.

All of this creates a perfect storm of risk that most people haven’t even considered in their retirement planning, including:

  • The potential of a significant reduction in purchasing power over a 25 to 30 year retirement horizon.
  • The potential need to accelerate the spend-down of capital to meet life style needs or pay for increasing medical costs.
  • The high probability that the wife will outlive the husband by as much as 10 to 15 years

Today’s retirees face new challenges in preparing for a life in retirement that can last another 30 years or more. They must be able to accumulate their own capital at a rate that exceeds inflation and then they must be able to sustain a rate of growth on their capital in order to close the income gap and prevent a loss of purchasing power.

Real Risks vs. Perceived Risks

Your retirement investment strategy can’t ignore the ever-present risks of inflation and longevity.

Of course, we would all enjoy the peace-of-mind that comes from investing in ultra-safe investments without the risk of losing money due to stock market declines. However, the reality is that the risk of asset value loss is only a perceived risk because you can’t actually lose money unless you sell your securities after a market decline.  Plus, through an intelligent investment strategy, risk and volatility can be managed and mitigated.

Retirees need to focus on the “real” risks of inflation and longevity which, without a deliberate strategy to overcome them, will inevitably erode the value of their assets. 

Investing for sustained long-term growth requires a well-conceived strategy based in sound investment principles and practices. Few people are equipped with the knowledge, patience and discipline needed to develop and manage a long-term investment strategy on their own, which is why you should seek the guidance of an experienced, objective, independent financial advisor.

*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2024 Advisor Websites.