The Department of Labor calls for employers to educate their committee members on their roles and responsibilities. Employees must know about the impacts of longevity risk and how to mitigate it, as the committee is responsible for addressing it. We have created a Fiduciary Training presentation that covers this topic and the information a committee needs to understand.
We cover some of the information provided in the training below.
Understanding Longevity Risk
When attempting to understand longevity risk, examining the data around life expectancy and retiree demographics is imperative to get the whole picture. According to the United Nations-World Population Prospects, life expectancy is predicted to increase over time, and the average is currently between 75 and 80 years. In addition, this is a 20% annual percent change. This is interesting, as although life span is believed to increase, the change in percentage annually will eventually plateau. This makes sense because there is a cap on how long people can live, even with healthcare benefits. The risk with this is the potential of a retiree outliving their benefits and not being able to survive once they run out.
The Financial Implications of Living Longer
While the two primary life guarantees are death and taxes, a third expectation is that the prices of products and services will increase over a person’s lifetime. When analyzing the average monthly expenses for retirees, certain trends become apparent. The top four expenses, from most costly to least, are housing, food, transportation, and medical insurance. This is expected; however, it becomes a difficult hurdle to jump over when you no longer possess an income. Additionally, while bills can be decreased with optimal spending habits, others, such as medical payments, are required to continue living a normal life. This can make retirement strenuous to navigate.
Average US Life Expectancy
Due to medical research and technological advancements, more people live to be older. Based on the life expectancy of 65-year-old people, on average, men spend 19 years alive post-retirement while women spend 22 years. Also, it is important to note that as age increases, the Average Future Years decreases exponentially for both men and women.
Mitigating Longevity Risk: Strategies and Solutions
Multiple strategies are recommended to mitigate longevity risk. First, there is investment diversification. This means a retiree would begin receiving interest incomes and dividend income-oriented strategies to avoid drawing down principal during decumulation. There are also annuities, where investors may transfer their longevity risk to an insurance company in exchange for compensation. Another interesting strategy is committing to a delayed retirement. However, this option is less likely to be pursued, as defined contribution plans have long struggled with encouraging timely retirements in the workforce. The last choice to help one’s retirement situation is utilizing lifestyle adjustments. While many expenses are relatively fixed, discretional spending tends to decline over time, meaning more money will be in a retiree’s pocket just by circumstance.
The Committee’s Role in Addressing Longevity Risk
Finally, it is necessary to mention that the committee’s role is to address longevity risk. The Prudent Process is where all of this occurs. This concept involves documentation, gathering relevant information, analyzing it, and finally, meeting and deciding. This process can be administered through education and communication.
You can download our full Fiduciary Training presentation on this topic here.
Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice.