Longevity risk is the danger of outliving your retirement savings. With life expectancy rising, retirees may need to fund 30+ years of retirement. Planning only to average life expectancy means a coin-flip chance of running short — stress-testing to age 90–95 is essential.
Longevity risk is the financial risk that a retiree lives longer than their savings can sustain. As medical advances and healthier lifestyles push life expectancy higher, this has become one of the most significant and underappreciated risks in retirement planning. Unlike market risk, which fluctuates, longevity risk only moves in one direction — every year you live is one more year your portfolio must fund.
How It Works
Longevity risk is a function of three variables:
- Life expectancy uncertainty: Average life expectancy for a 65-year-old is roughly 83–86, but there's enormous variance — roughly 25% of 65-year-olds will live past 90, and 10% past 95
- Portfolio withdrawal period: The longer retirement lasts, the more vulnerable the portfolio becomes to market downturns, inflation, and spending needs
- Compounding inflation: Even moderate 3% annual inflation cuts purchasing power in half over 24 years — a serious concern for retirements lasting 30+ years
The challenge is that you must plan for an unknown duration. Plan for too few years and risk destitution; plan for too many and unnecessarily sacrifice lifestyle.
| Retirement Duration | 4% Rule Success Rate | Key Risk |
|---|---|---|
| 20 years | ~98% | Low — most plans survive |
| 25 years | ~96% | Moderate — inflation starts to bite |
| 30 years | ~93% | Meaningful — the original 4% rule horizon |
| 35 years | ~85% | High — early retirees and long-lived individuals |
| 40 years | ~75% | Very high — FIRE practitioners face this |
Why It Matters for Retirement Planning
Longevity risk interacts with every other retirement risk:
- Sequence-of-returns risk: A longer retirement means more opportunities for a devastating early bear market
- Inflation risk: 3% inflation is manageable over 15 years but devastating over 35
- Healthcare costs: The highest medical expenses typically come in the final years of life, precisely when the portfolio may be most depleted
The most effective mitigation strategies include delaying Social Security to age 70 (increasing lifetime benefits by 76% over claiming at 62), purchasing an annuity for baseline income, and maintaining adequate equity exposure for long-term growth.
A Practical Example
A couple retires at 65 with $1,500,000, withdrawing $60,000/year (4%):
- Plan to age 85 (20 years): Very high confidence. They likely leave a large inheritance.
- Plan to age 90 (25 years): Comfortable, but a prolonged bear market could create stress in the final years.
- Plan to age 95 (30 years): The 4% rule's original design horizon. Success depends heavily on early-retirement market conditions.
- One partner lives to 98 (33 years): Without dynamic spending adjustments, there's a meaningful chance of portfolio depletion in the final years.
Running a Monte Carlo simulation across these horizons reveals exactly how much each additional year of longevity costs in terms of success rate.
Frequently Asked Questions
- What is longevity risk in retirement planning?
- Longevity risk is the chance of outliving your savings. If your retirement plan is designed for 25 years but you live 35 years past retirement, you face a decade of potential financial shortfall. As life expectancy increases, this risk becomes more significant for every retiree.
- How long should I plan for my retirement to last?
- Financial planners typically recommend planning to age 90-95, not just average life expectancy (around 80-85). A 65-year-old couple has roughly a 50% chance that at least one partner lives past 90. Planning to the average means a coin-flip chance of running out of money.
- What is the best way to protect against longevity risk?
- Key strategies include lower withdrawal rates, delaying Social Security to maximize lifetime benefits, purchasing an annuity for baseline income, maintaining equity exposure for long-term growth, and using Monte Carlo simulation to stress-test plans over 30-40 year horizons rather than just 20-25.