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longevity risk: on not outliving your money?

May 25, 2021 • | Law Office of Zachary D Kamykowski, PLLC
Backcasting If you have a goal, you can improve the chances of reaching that goal, by imagining that you have achieved the goal. From that vantage point, you then reflect on what steps you took to achieve that goal. This technique is called backcasting. Annie Duke discusses it in her recent book, How to Decide. […]


If you have a goal, you can improve the chances of reaching that goal, by imagining that you have achieved the goal. From that vantage point, you then reflect on what steps you took to achieve that goal. This technique is called backcasting. Annie Duke discusses it in her recent book, How to Decide.

I'll assume that you have the goal of not outliving your money. Imagine yourself deep into retirement, and not having to worry about having enough money to cover your essential expenses and your discretionary expenses. What steps would you have taken now, and up until then, to get to that goal?

You probably would have engaged in some combination of strategies hedging longevity risk to your retirement portfolio.

But before you can hedge longevity risk, you need to determine the likelihood that you will outlive your money. Longevity risk is the danger that you will spend all of your nest egg before you pass.

Perhaps you have played around with the monthly retirement savings calculator from a prior post: "How to know if you are saving enough for retirement?" Let's say that after entering in your specific information, the calculator indicates in the calculations section that you will require about $1.5m in lump sum savings on the first day of retirement. What you really want to know, is if you have indeed saved that much, is it enough to live on without running out of money?

Now, let's assume that Social Security remains an option for you - and there's no financial reason why it wouldn't, as I've argued in a prior post - so, you won't literally run out of money. But, you may run out of enough money to maintain your pre-retirement lifestyle.

Hedging Longevity Risk: Some Strategies

In hedging longevity risk, you might consider undertaking one or some combination of several strategies:

  • save more earlier in your career (or start saving more earlier than you intended);
  • allocate those savings more aggressively for longer;
  • work longer;
  • optimize your social security retirement benefits;
  • annuitize a portion of your retirement savings

Saving More

Taking each strategy in turn, you could save a larger percentage of your earnings earlier in your career. But, that's likely water under the bridge. Looking to the present and forward, you could make sure that you are at least saving enough in your 401(k) (should you have the option), to trigger any employer match. That's free money, that you could benefit from if you started late. I don't necessarily recommend maxing out your 401(k) savings unless I have analyzed your specific situation. The point of saving for retirement for most clients is to maintain their current lifestyle. You likely don't want to live beyond your means today so that you can live beyond it in retirement. This is the concept of income-smoothing and involves something economists call utils. I'll cover that in a subsequent post and keep on track with longevity risk hedging strategies.

Allocate Your Savings Less Conservatively

If you combine saving more earlier, with a more aggressive allocation of those savings, you could increase your nest egg. Of course, allocating towards higher returns likely requires more exposure to risk. By chasing higher returns, you risk flying too close to the sun. But, with financial engineering (which can be a part of your Comprehensive Wealth Plan) we can optimize your investment allocations to meet your risk/return requirements. In addition, it is my experience that clients are often invested much too conservatively because they are thinking only about the allocation of their financial capital, rather than their total capital. Oh look, here's a report I wrote about this: "The Readiness is All: An Essential Retirement Savings Report."

Work Longer

If you work longer, you have the opportunity to save more. Moreover, you reduce the length of your retirement - so, require fewer savings. Working longer can seem defeating. But, for many, working longer provides a sense of meaning that some would find hard to replicate without work. You might be the type of person who has built up a career that has become so entwined with your sense of self, that giving it all up, may prove more difficult than you envisioned initially. Jay Pritchett's long goodbye to his company on Modern Family comes to mind.

Social Security Retirement Age Optimization

By optimizing your Social Security Retirement Benefits - a service that you can add to a Comprehensive Wealth Plan - you can potentially increase your retirement income floor. As such, you would need a smaller nest egg to cover your essential expenses. With less of your retirement savings required for your essential spending, you have more flexibility with regard to how you spend and allocate those funds.

You can more easily hedge against longevity risk in down years by spending less on discretionary expenses in that or the following year. In addition, with a higher floor achieved through Social Security Retirement optimization, you can allocate your retirement savings less conservatively during retirement. But, Social Security alone probably won't provide you with a sufficient floor, so you might consider a partial annuity.

Partial Annuitization

With an annuity, you purchase a guaranteed income for a term, or life, with a lump-sum payment. You may receive $2,000 a month from Social Security. You may want to increase your essential spending floor by another $1,500 a month for the rest of your life. Using the example touched on above, if you had saved $1.5m for your retirement, you could purchase a single life annuity for about $280,000 which would provide you with a guaranteed monthly income of an additional $1,500 per month. This would increase your essential retirement income floor to $3,500 per month - or ~$42,000 per year.

The Social Security portion of that floor would benefit from some inflation adjustment annually with Cost of Living Adjustments (COLA). Unless you paid a higher lump sum for the annuity, it would remain unadjusted for inflation. Depending on your age, financial circumstances, and personality, that might be ok. So, of your initial $1.5m, you would retain about $1.2m to further fund your essential and discretionary expenses.

If you choose to increase your essential retirement income floor with a partial annuity, you have more freedom to invest your retirement savings less conservatively. In that way, you may have the ability to budget more vacations or gifting to your family or charity than you could do otherwise. In addition, because you are hedging longevity risk, you may feel freer to spend more earlier in your retirement, when you are likely healthier. It can be useful to think of retirement falling into three categories: "Go-Go" (62-70), "Slow-Go" (70-85), "No-Go" (85-onward). Spending levels by retirees tend to look like a smile: higher in the "Go-Go" years, lower in the "Slow-Go" years, and higher in the "No-Go" years.

By increasing your essential spending floor with an annuity, you can perhaps spend more during the "Go-Go" years, and less during the "Slow-Go" years. The "No-Go" years often require higher spending on medical expenses.

Retirement Ruin Calculator

The calculator below, derived from The Calculus of Retirement Income by Moshe A. Milevsky, can help you start thinking about your longevity risk.

It is based on the following formula Dr. Milevsky covers in Chapter 9:

I highly encourage you to read the book.

But, for now, you only have to enter in some basic data:


  1. Your anticipated age of retirement;
  2. Your goal for your retirement savings at the beginning of your retirement;
  3. The annual income requirement you anticipate you will need in retirement.


  1. Your guess as to the volatility of your retirement portfolio (during retirement)
  2. Your guess as to the average annual return of your retirement portfolio (during retirement)

If you have any questions about the calculator or would like to learn more about how I can help you hedge your longevity risk, do not hesitate to schedule a consultation.

Law Office of Zachary D Kamykowski, PLLC

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Austin, TX 78738

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