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Wealth Management - February 2024

by Stacy Wise | Feb 05, 2024

Dealing with Longevity Risk in Retirement


Written by Rick Imhoff, CFP®


There are several risks to consider when planning for retirement so that you maintain your standard of living during retirement.  Some of these risks include inflation, investment, economic, significant health issues, and unexpected emergencies or repair bills.  However, the biggest risk and concern for many retirees is outliving their income.


Life expectancy continues to increase as we have access to more medical advances to extend life and learn about activities of a healthy lifestyle such as exercise and diet.  It is becoming more common for people to live into their 90’s and beyond.  For some of us, our retirement years may be as long or longer than our working years.  More money will likely be needed to fund a longer retirement as social security and a pension may fall short of covering all our income needs.  Even if they are enough, life happens, and additional income may be needed at some point.


The first thing to do to deal effectively with this longevity risk is to establish a baseline of expenses you expect to incur at the beginning of retirement.  This baseline of expenses will include your “core” expenses of housing, utilities, food, clothing, transportation, insurance, etc.   Add to those core expenses other “optional” expenses, such as entertainment, travel, gifts, vacations, etc.   Once this baseline of expenses is established, you will need to factor in an annual increase in those expenses.  As we have seen over the past several years, the cost of most things we buy every day goes up in price over time.  Sometimes this occurs at a rapid pace, sometimes at a slower pace.  Therefore, when calculating the sum of money you need at the beginning of retirement, you must consider some cost-of-living increase.


You then need to identify the rate of return you expect to earn on your investments during retirement.  This will depend on the risk (volatility) you are willing to accept.  If you have a low risk tolerance, you will be looking at around a 4-6% return based on the current level of interest rates.  If you have a higher risk tolerance, you could earn an average of 7-10% on your investments based on historical returns on equities.  With inflation currently running at 3-4% and you have a low risk tolerance, your purchasing power may erode quickly, forcing you to invade the principal of your investments.


Of course, your investments will not earn a constant rate of return throughout retirement.  Favorable market and economic conditions could improve your rate of return and may allow you to increase your spending.  However, tougher conditions may lower your rate of return for a couple of years.  You may need to temporarily reduce your spending during those times.  Ideally, it would be best to set aside funds during good times and have them available if needed during bad times.


Finally, you will need to monitor the progress towards achieving your retirement goal at least once a year.  Just because you have a good year with your investments does not necessarily mean you can save less the following year.  Always remember, it is not a problem when you end up with too much money, but it can be a problem when you don’t.  Set aside money for as long as you can, watch your expenses, and adjust as needed.




Rick Imhoff, CFP®, is Executive Vice President & Wealth Management Division Head for MidAmerica National Bank. He can be reached at (309) 647-5000, ext. 1130 or by email.

Investments are not FDIC-insured, hold no bank guarantee, may lose value, are not a deposit, and are not insured by any federal government agency.

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