Longevity Risk Explained: How to Make Your Money Last in Retirement

You’re planning for retirement, running the numbers, and feeling pretty good about your savings. Then someone asks the uncomfortable question: “But what if you live to 100?”

Suddenly, that comfortable 30-year retirement plan looks dangerously short. Add another 5-10 years, and your spreadsheet turns red. Welcome to longevity risk—the very real possibility that your biggest retirement problem might be living “too long.”

Here’s the uncomfortable truth: medical advances are extending lifespans faster than most people are extending their savings plans. Moreover, the consequences of underestimating your lifespan are catastrophic because you can’t exactly go back to work at 85 when the money runs out.

This guide will help you understand longevity risk and, more importantly, create strategies to ensure your money outlasts you regardless of how long you live.

The Retirement Planning Paradox Nobody Discusses

Traditional retirement planning assumes you know when you’ll die. Pick an age—say, 85—and plan your finances to last until then. Simple, logical, and completely unrealistic.

Why Life Expectancy Averages Mislead You

Understanding longevity risk requires looking beyond average life expectancy. If the average life expectancy is 80, many people plan to retire at 65 with finances lasting 15 years. This sounds reasonable until you understand what “average” actually means.

Average life expectancy includes everyone who dies young. Heart attacks at 55. Accidents at 40. Cancer at 60. These early deaths drag down the average significantly. However, if you’ve already made it to 65 in relatively good health, your remaining life expectancy is much longer than the overall average suggests.

Consider these numbers:

Overall life expectancy: 77-80 years
Life expectancy at age 65: 83-86 years
50% chance of living past: 85-90 years
25% chance of living past: 92-95 years

Notice the problem? If you plan for average life expectancy and you’re in that unlucky 25% who live longer, you’ll spend your final years in poverty. Conversely, planning for the upper range means potentially dying with substantial unused assets.

The Couples Multiplication Factor

For married couples, longevity risk multiplies dramatically. You’re not planning for one person to live past average—you’re planning for the possibility that at least one of you lives significantly longer.

Statistical reality for a 65-year-old married couple:

50% chance one spouse lives past 90
25% chance one spouse lives past 95
10% chance one spouse lives past 100

Therefore, retirement planning for couples should assume a 35+ year time horizon, not the 20-25 years that average life expectancy suggests. This dramatically increases the assets needed to fund retirement securely.

The Inflation Compounding Problem

Living longer doesn’t just mean more years of expenses—it means more years of inflation compounding. At 3% annual inflation, the cost of living doubles approximately every 24 years.

Consequently, your $50,000 annual expenses at age 65 become $100,000 at age 89. If you live to 95, you’re looking at roughly $120,000 annually in today’s equivalent purchasing power. Most retirement plans dramatically underestimate this compounding effect because they don’t account for multi-decade retirement periods.

Understanding the Four Dimensions of Longevity Risk

Longevity risk isn’t a single problem—it’s four interconnected challenges that compound each other. Let’s examine each dimension and how they interact.

Dimension 1: Outliving Your Assets

The most obvious risk is simply running out of money before you die. You’ve saved $1 million, plan to withdraw $50,000 annually, and expect your money to last 25 years with investment returns. Then you live 35 years. Oops.

Planning for longevity risk requires addressing this fundamental asset depletion concern. However, it’s not just about having enough total money—it’s about maintaining purchasing power across decades while managing market volatility.

Dimension 2: Spending Phase Risk

Your spending needs aren’t constant across retirement. Research shows retirement spending typically follows a pattern:

Early retirement (65-75): Higher spending on travel, activities, hobbies. You’re healthy, active, and enjoying newly available time. These “go-go years” often see spending above pre-retirement levels.

Mid retirement (75-85): Spending moderates as activity levels naturally decrease. Travel becomes less frequent. Hobbies shift toward less expensive options. These “slow-go years” typically show reduced discretionary spending.

Late retirement (85+): Healthcare costs spike dramatically while discretionary spending drops further. These “no-go years” see total spending that varies wildly based on health status.

The risk emerges from uncertainty about when each phase occurs and how long it lasts. Someone who remains healthy and active until 85 has very different spending patterns than someone whose health deteriorates at 75. Therefore, planning requires flexibility to adjust for the actual health trajectory rather than assumed timelines.

Dimension 3: Sequence of Returns Risk

Market returns average around 8-10% over long periods, but the sequence matters enormously for retirees. Experiencing a market crash early in retirement can permanently impair your portfolio’s longevity.

Consider two retirees with $1 million, withdrawing $50,000 annually:

Scenario A: Markets crash 30% in year one. Portfolio drops to $700,000 after withdrawal. Even if markets recover fully later, the early damage is done. The portfolio recovers more slowly because you’re withdrawing from a smaller base.

Scenario B: Same average returns over 30 years, but a crash happens in year 15 instead. The portfolio has grown first, providing a buffer against the drawdown. The outcome is dramatically better despite identical average returns.

This sequence risk compounds with longevity risk. The longer you live, the more market cycles you experience, increasing the probability of encountering poor returns at catastrophic timing.

Dimension 4: Healthcare Cost Escalation

Healthcare costs inflate faster than general inflation. While overall inflation runs 2-3% annually, healthcare costs often increase 5-7%. Moreover, individual healthcare needs become more expensive and unpredictable with age.

Consider average healthcare spending by age:

Ages 65-74: $15,000-$20,000 annually
Ages 75-84: $25,000-$35,000 annually
Ages 85+: $40,000-$60,000+ annually

These numbers don’t include potential long-term care needs, which can add $50,000-$100,000+ annually. Consequently, a 95-year-old might face combined healthcare and long-term care costs exceeding $100,000 per year—money that must come from somewhere.

Traditional Retirement Strategies and Why They Fail

Most conventional retirement planning advice was developed when life expectancies were shorter and retirement periods lasted 10-15 years. These strategies break down when applied to modern 30+ year retirements. Let’s examine the failures.

The 4% Rule: A Dangerous Oversimplification

The famous “4% rule” suggests you can withdraw 4% of your initial portfolio annually, adjust for inflation, and your money will last 30 years. Research from the 1990s supported this guideline.

However, several problems undermine the 4% rule today:

Lower expected returns: The original research assumed higher bond yields and stock returns than current market conditions suggest. With bonds yielding 3-4% instead of 6-8%, the math changes significantly.

Longer retirement periods: The 4% rule was designed for 30-year retirements. If you live 35 or 40 years, the failure rate increases substantially.

Sequence of returns vulnerability: The rule assumes you can weather early market crashes. In reality, a severe crash in the first few years can make the 4% rule unsustainable.

Inflexibility: The rule doesn’t adjust for market conditions, health changes, or spending needs. It’s a blunt instrument for a nuanced problem.

Modern longevity risk management requires more sophisticated approaches than simple withdrawal rate rules.

The “Die with Zero” Fallacy

Some recent retirement advice suggests spending everything perfectly so you die with exactly zero dollars. This sounds efficient—why leave money unspent if you could have enjoyed it?

The problem is obvious: you don’t know when you’ll die. Planning to die with zero means one of two outcomes:

You die “early”: Mission accomplished, you spent all your money before dying. Of course, you couldn’t have known you’d die early, so you probably overspent and reduced your quality of life worrying about running out.

You live “long”: You run out of money years before death, creating exactly the catastrophe you were trying to avoid.

Furthermore, “die with zero” completely ignores the value of leaving assets to family or charity. Not everyone wants to maximise personal consumption at the expense of legacy.

The Pension Assumption Problem

Older retirement planning assumed most people had pensions providing guaranteed lifetime income. You only needed savings to supplement the pension base. Therefore, running out of personal savings was inconvenient but not catastrophic.

Modern retirees rarely have pensions. Social Security provides some base income, but it’s usually insufficient alone. Consequently, personal savings must fund the entire retirement, dramatically increasing the assets needed and the longevity risk if those assets deplete early.

Smart Strategies for Managing Longevity Risk

Given the failures of traditional approaches, what actually works for managing longevity risk? Let’s examine strategies backed by research and real-world evidence.

Strategy 1: Guaranteed Income Floor

The most effective longevity risk management creates a guaranteed income floor covering essential expenses. This floor continues regardless of how long you live or what markets do.

Components of guaranteed income floor:

Social Security: Maximise benefits by delaying claiming until age 70 if possible. Each year you delay increases payments by roughly 8%, creating a much higher lifetime benefit if you live long.

Immediate annuities: Purchase annuities that pay guaranteed income for life. Yes, you give up access to principal. Yes, you “lose” if you die early. Nevertheless, you eliminate longevity risk for the income they provide.

Pension income: If you’re fortunate enough to have a pension, this forms part of your guaranteed floor.

TIPS or I-Bonds: Treasury Inflation-Protected Securities or I-Bonds provide guaranteed income with inflation protection, though rates are currently modest.

Once your guaranteed income covers essential expenses (housing, food, healthcare, utilities), you’ve eliminated the catastrophic scenario of complete destitution. Your remaining savings can then fund discretionary spending with less pressure.

Strategy 2: Dynamic Withdrawal Strategies

Rather than fixed 4% withdrawals, adjust withdrawal rates based on portfolio performance and remaining life expectancy.

Good market years: Withdraw slightly more, perhaps 4.5-5%, permitting yourself to enjoy better returns.

Poor market years: Reduce withdrawals to 3-3.5% temporarily, preserving principal during market stress.

Age-based adjustments: Gradually increase withdrawal percentages as you age, and your remaining life expectancy decreases. At 65, maybe 3.5%. At 75, perhaps 4%. At 85, possibly 5%+.

This dynamic approach adapts to actual conditions rather than following a rigid rule regardless of circumstances. Moreover, it naturally adjusts spending based on portfolio sustainability, preventing catastrophic depletion.

Strategy 3: Bucketing Approach

Divide assets into time-based “buckets” with different investment strategies for each:

Bucket 1 (Years 1-5): Cash and short-term bonds covering 5 years of expenses. This money never experiences market volatility. You always have 5 years of spending security regardless of what markets do.

Bucket 2 (Years 6-15): Moderate allocation to stocks and bonds. This money can handle some volatility but still maintains relative stability.

Bucket 3 (Years 16+): Aggressive stock allocation seeking growth. This money has decades to recover from market crashes, so it can pursue higher returns.

As you spend from Bucket 1, periodically refill it from Bucket 2. Refill Bucket 2 from Bucket 3. This creates a systematic approach to managing sequence-of-returns risk while maintaining growth potential.

The bucketing strategy provides psychological comfort—you always see 5+ years of expenses secure—while allowing appropriate risk-taking with longer-term money.

Strategy 4: Longevity Insurance (Deferred Annuities)

Traditional immediate annuities start paying right away. Longevity insurance (deferred income annuities) starts paying at advanced ages, typically 80-85.

Example: Purchase a $100,000 deferred annuity at age 65 that begins paying $20,000 annually starting at age 85. If you die before 85, you “lose” the $100,000. However, if you live past 85, you have a guaranteed income for however long you live.

This approach costs dramatically less than immediate annuities because insurance companies only pay out if you live to advanced ages. Many people die before 85, so the insurance company keeps the premium. For those who do live past 85, the income provides crucial protection against the exact scenario traditional planning struggles with.

Solving longevity risk often involves combining guaranteed income products with flexible investment strategies rather than relying entirely on either approach.

Strategy 5: Part-Time Work Buffer

This might seem obvious, but part-time work during early retirement dramatically improves longevity risk management. Working even 10-20 hours weekly at age 65-70:

Reduces portfolio withdrawals: Less money coming from savings means more time for growth and compounding.

Maintains social connections: Work provides structure and social engagement that benefits health and longevity.

Delays Social Security: Continued income allows delaying Social Security claims, increasing eventual benefits.

Provides purpose: Many retirees struggle with a sudden lack of purpose. Part-time work addresses this psychological need.

You don’t need career-level income. Even $15,000-$25,000 annually makes an enormous difference to portfolio longevity. Furthermore, you can stop working once portfolio growth and Social Security maximise your guaranteed income floor.

Strategy 6: Reverse Mortgage as Longevity Backup

Reverse mortgages have deservedly poor reputations due to predatory lending practices. However, as a strategic longevity risk tool, they can serve valuable purposes.

Consider establishing a reverse mortgage line of credit in your 60s, but not drawing on it. The credit line grows over time. If you reach your 80s or 90s and your portfolio is depleted, you can draw on the reverse mortgage to maintain spending.

This approach turns home equity into a longevity insurance policy. You only tap it if needed, but it’s available if longevity risk becomes reality. Meanwhile, if you die with the line untapped, your heirs inherit the home as normal.

Important caveats: Only consider this with low-fee reverse mortgages from reputable lenders. Understand all terms completely. Don’t use reverse mortgages for discretionary spending—reserve them as a true longevity backstop.

Healthcare Planning: The Wild Card in Longevity Risk

Healthcare costs represent the most unpredictable element in retirement planning. Two retirees with identical assets can experience drastically different outcomes based solely on health trajectories. Let’s address this directly.

Medicare Coverage Gaps You Must Plan For

Medicare covers less than many people assume. Understanding the gaps helps you plan for actual costs:

Part A (Hospital): Covered after deductible, but only for a limited time. Extended hospital stays create substantial out-of-pocket costs.

Part B (Medical): Covers 80% after deductible. You pay 20% of all medical bills—no cap. A $100,000 cancer treatment costs you $20,000+ personally.

Part D (Prescription): Helps with medications but includes coverage gaps (“doughnut hole”) where you pay higher percentages.

Dental, vision, hearing: Not covered at all. These needs increase with age and can cost thousands annually.

Long-term care: Medicare provides minimal coverage. Nursing home or in-home care comes almost entirely from personal funds.

Therefore, realistic retirement planning must budget for these gaps. Depending on health, you might spend $15,000-$60,000 annually on healthcare beyond Medicare coverage.

Long-Term Care: The Retirement Budget Destroyer

Long-term care costs dwarf other healthcare expenses. Current costs average:

Home health aide: $50,000-$70,000 annually
Assisted living facility: $50,000-$80,000 annually
Nursing home: $90,000-$120,000 annually

Furthermore, these costs continue for years. Average duration of long-term care needs:

Men: 2.2 years average
Women: 3.7 years average
20% of people need care for 5+ years

Consequently, long-term care can consume $200,000-$500,000+ of retirement savings. A couple where both spouses eventually need care could face costs exceeding $800,000.

Long-Term Care Insurance: Worth It or Not?

Long-term care insurance theoretically addresses this risk. You pay premiums for decades. If you need care, insurance pays for it. Sounds perfect.

Reality is more complicated:

Premiums increase: Insurance companies can raise premiums dramatically, sometimes doubling or tripling costs over time.

Use-it-or-lose-it: If you die without needing long-term care, you’ve paid premiums for nothing.

Complexity: Policies contain numerous exclusions, limitations, and conditions that may prevent payment when you need it.

Company stability: Some long-term care insurers have gone bankrupt, leaving policyholders without coverage.

Alternative approach: self-insure by maintaining sufficient assets to cover potential long-term care costs. For this to work, you need substantial assets ($1M+) and comfort accepting the risk. Otherwise, long-term care insurance might be worth considering despite its flaws.

Hybrid life insurance policies with long-term care riders offer another option—if you don’t use long-term care benefits, your heirs receive a death benefit instead. This reduces the “use-it-or-lose-it” problem.

The Psychological Dimension of Longevity Risk

Numbers and strategies matter, but retirement success depends equally on psychological factors. Let’s address the mental aspects of managing longevity risk.

Overcoming the Scarcity Mindset

Many retirees who saved diligently for decades struggle to actually spend their savings. They’ve internalised “save, don’t spend” so deeply that retirement feels wrong. Consequently, they live below their means unnecessarily, reducing the quality of life despite having adequate resources.

This scarcity mindset creates a different kind of longevity risk—dying with substantial assets unspent while your retirement years were unnecessarily frugal. Finding a balance between prudent caution and actually enjoying your money requires conscious effort.

Strategies to overcome scarcity mindset:

Separate essential from discretionary spending: Once you’ve covered essentials with guaranteed income, permit yourself to spend discretionary money on experiences and quality of life.

Set spending guardrails: Create rules like “I’ll spend between $X and $Y annually based on portfolio performance.” This provides both safety and permission.

Frame spending as achieving goals: Don’t think “I’m spending money.” Think “I’m funding travel/hobbies/family time that I’ve earned.”

Remember the end game: You saved money to have a good retirement. Having a miserable retirement with a large estate defeats the purpose.

Managing Spending Flexibility

Retirement success requires flexibility to adjust spending based on changing circumstances. Rigid spending plans fail because life doesn’t cooperate with rigid plans.

Build in tiered spending categories:

Tier 1 – Essential: Must maintain regardless of circumstances (housing, food, healthcare, utilities)

Tier 2 – Important: Maintain except during severe portfolio stress (hobbies, social activities, gifts to family)

Tier 3 – Discretionary: Cut during market downturns or health issues (travel, luxury purchases, major renovations)

This tiering allows you to reduce spending 20-30% temporarily if needed, without compromising quality of life fundamentally. Moreover, it prevents panic selling during market crashes—you just drop to Tier 1 spending temporarily until markets recover.

The Cognitive Decline Risk

Here’s an uncomfortable reality: many people experience cognitive decline in their 80s and 90s that impairs financial decision-making. This cognitive risk compounds longevity risk because you might need your money to last longest exactly when you’re least capable of managing it effectively.

Protections against cognitive decline financial risk:

Automate everything: Set up automatic bill payments, required minimum distributions, and other necessary transactions so they don’t require active management.

Establish power of attorney: Designate trusted individuals to manage finances if you become incapacitated. Do this while you’re still mentally sharp enough to choose wisely.

Simplify holdings: As you age, reduce portfolio complexity. You don’t need 15 different funds. Three or four simple index funds work fine and are easier to manage or hand off to someone else.

Regular advisor check-ins: If you work with a financial advisor, maintain regular meetings even if nothing has changed. This creates oversight that can catch cognitive decline early.

Stress-Testing Your Retirement Plan

Creating a retirement plan is one thing. Knowing whether it actually works under stress is another. Let’s examine how to stress-test your longevity risk management.

Monte Carlo Simulation Reality

Monte Carlo simulations run thousands of scenarios with different return sequences, inflation rates, and lifespans. Then they tell you your “probability of success”—perhaps “85% chance your money lasts 30 years.”

This sounds scientific. However, understand the limitations:

Garbage in, garbage out: Simulations depend entirely on assumptions about returns, inflation, and spending. Bad assumptions create false confidence.

Binary outcomes: Simulations typically define “success” as not running completely out of money. But ending retirement with $1 is technically “success” even though it’s basically a failure.

No adaptation: Most simulations assume you’ll stick to fixed withdrawal rates regardless of circumstances. Real people adjust behaviour based on portfolio performance.

Nevertheless, Monte Carlo simulations provide useful information if you understand limitations. Look for plans with 85%+ success rates under conservative assumptions.

Worst-Case Scenario Planning

Instead of probabilities, consider worst-case scenarios directly:

What if you live to 100? Does your plan still work?

What if markets crash 40% in year two of retirement? Can you recover?

What if you need long-term care for 5+ years? Where does that money come from?

What if healthcare costs triple from projections? Do you have buffer room?

If your plan survives all these worst cases simultaneously, you’re genuinely secure. If it only survives one or two, you have specific vulnerabilities to address.

Annual Review Triggers

Establish specific triggers that require plan review and potential adjustment:

Portfolio drops 20%+ from peak: Review withdrawal rates and spending priorities.

Healthcare costs exceed projections by 50%+: Evaluate whether long-term care insurance makes sense.

Spending consistently below plan by 25%+: Consider whether you’re being unnecessarily frugal.

Major life changes: Health diagnosis, death of spouse, family financial emergency—all require plan reassessment.

These triggers prevent drift, where your plan becomes outdated without you realising it until it’s too late to course-correct.

The Bottom Line: Planning for Uncertainty

Longevity risk boils down to one fundamental challenge: you must plan for an unknown future. You don’t know how long you’ll live, what returns markets will deliver, what health challenges you’ll face, or what life will cost in 20 years.

Given this irreducible uncertainty, the winning strategy is not precision—it’s resilience. Build a plan that can absorb shocks, adapt to changing circumstances, and maintain acceptable outcomes across a wide range of possible futures.

Key principles for longevity risk resilience:

Guarantee the essentials: Use Social Security, annuities, or other guaranteed income sources to cover basic living expenses. This eliminates the catastrophic scenario.

Maintain flexibility: Dynamic spending and withdrawal strategies beat rigid rules when facing uncertain futures.

Diversify longevity protection: Combine multiple strategies—guaranteed income, growth investments, healthcare planning, work optionality. Don’t depend entirely on any single approach.

Start conservative, adjust as needed: Better to plan for 100 and die at 85 with money left than plan for 85 and live to 100 broke. You can always increase spending if health deteriorates or assets grow beyond needs.

Update regularly: Review your plan annually. Circumstances change. Markets change. Your plan should change, too.

The goal isn’t perfect optimisation. It’s ensuring your money outlasts you by a comfortable margin, allowing you to enjoy retirement without constant financial anxiety.

Your biggest retirement risk isn’t market crashes, inflation or healthcare costs individually. It’s living long enough to experience all of them sequentially. Plan accordingly.

Spend some time for your future.

To deepen your understanding of today’s evolving financial landscape, we recommend exploring the following articles:

Quantum Computing Stocks: Are We Watching the Dot-Com Bubble 2.0?

Calculate Before You Refinance: A Complete Guide to Student Loan Private Rates (U.S.)

War Economy Chapter 5: Fear, Uncertainty, and Markets: The Psychology Behind Wartime Investing

How to Pay Off Debt in 4 Years: A Strategic Roadmap That Actually Works

Explore these articles to get a grasp on the new changes in the financial world.

Disclaimer: This article provides educational information about retirement planning and longevity risk. It does not constitute financial, legal, or tax advice. Every person’s retirement situation is unique, involving different assets, health status, family circumstances, and risk tolerance. Insurance products, annuities, and investment strategies all carry risks and limitations. Before making retirement planning decisions, consult with qualified financial advisors, tax professionals, and insurance specialists who can evaluate your specific circumstances. Past performance does not guarantee future results, and all projections involve uncertainty.

References

Towerpoint Wealth. “How to Plan for Longevity Risk in Retirement.” Retrieved from https://towerpointwealth.com/how-to-plan-for-longevity-risk-in-retirement/
Motley Fool Wealth Management. “How to Manage Longevity Risk,” 21 Jan. 2025. Retrieved from https://foolwealth.com/insights/how-to-manage-longevity-risk
Riepe, Mark. “Longevity Risk: Could You Outlive Your Savings?” Charles Schwab, 28 Aug. 2025. Retrieved from https://www.schwab.com/learn/story/longevity-risk-could-you-outlive-your-savings
Wion, Matt, and Jessica Ruggles. “Solving Longevity Risk in Retirement.” New York Life. Retrieved from https://www.newyorklife.com/articles/solving-longevity-risk-in-retirement