What Is Longevity Risk - When Living Long Becomes a Risk
Longevity risk refers to the risk of outliving your retirement funds by living longer than expected. Japan's average life expectancy is 81.09 years for men and 87.14 years for women (2023), but these are merely averages. The remaining life expectancy for those who survive to age 65 is approximately 20 years for men (age 85) and approximately 25 years for women (age 90), and the probability of surviving to age 90 reaches approximately 28% for men and approximately 52% for women. The population aged 100 and over exceeded approximately 92,000 in 2023, increasing more than 100-fold over the past 50 years. If you plan your finances based on 'living to the average life expectancy,' roughly half of all people will face a funding shortfall.
The essence of longevity risk lies in the uncertainty of 'not knowing how long you will live.' Average life expectancy is merely a statistical expected value, and individual lifespans vary widely. With advances in medical technology, average life expectancy is likely to increase further, and by the time those currently in their 40s and 50s retire, survival rates beyond age 90 are predicted to be even higher. To address this uncertainty, financial planning that assumes the 'worst case scenario' is essential.
Three Strategies to Extend Asset Longevity - Investment, Withdrawal, and Income Diversification
Combining three strategies is effective for addressing longevity risk. The first is continuing to invest a portion of your assets after retirement. Rather than moving everything to deposits at age 65, maintaining a portfolio of approximately 30-40% stocks and 60-70% bonds aims for asset growth that outpaces inflation. The second is flexible adjustment of withdrawal rates. Adopting a dynamic strategy that modifies the previously mentioned 4% rule to 3-3.5% for Japan and adjusts based on market conditions. The third is diversification of income sources. By securing multiple income sources beyond public pensions, including individual annuity insurance, real estate income, and part-time employment, you can maintain your lifestyle even if one income source is interrupted.Related books on asset longevity and withdrawal strategies introduce specific investment and withdrawal plans.
Lifetime Annuities and Tontine Annuities - Transferring Longevity Risk Through Insurance
The ultimate countermeasure against longevity risk is transferring the risk to an insurance company. A lifetime annuity is a product that pays benefits as long as you live, with the total amount received increasing the longer you live. Particularly noteworthy are tontine annuities, which redistribute the accumulated funds of members who die early to those who live longer, achieving higher annuity payments than standard lifetime annuities. Deferring public pension benefits is also effectively an increase in lifetime annuity payments; deferring to age 75 provides an 84% increase in pension received for life. Combining self-directed asset management with insurance-based longevity risk transfer is the key to asset planning for the age of 100.
Correctly recognizing longevity risk and combining multiple countermeasures forms the foundation for a secure retirement.Related books on lifetime annuities and retirement security are also helpful for broadening your options for longevity risk countermeasures.
Next Actions to Prepare for Longevity Risk
To make your longevity risk preparations concrete, start by calculating your 'asset longevity.' Input your current asset amount, projected annual withdrawal amount, and investment return rate into a compound interest calculator and check the age at which your assets reach zero. If that age is below 95, you need to consider either increasing your contributions, lowering your withdrawal rate, or extending your retirement age.
Next, consider deferring your public pension benefits. Deferring from age 65 to 70 provides a 42% increase, and deferring to 75 provides an 84% increase, significantly boosting the lifetime pension amount you receive. Planning to cover living expenses during the deferral waiting period with iDeCo or NISA assets makes this the most reliable insurance against longevity risk. Optimizing the combination of self-help efforts and public systems is the key to asset planning for the age of 100.