Longevity Risk: Planning for the Risk of Outliving Your Money

Of all the risks in retirement planning, longevity risk — the possibility of outliving your financial resources — is the most fundamental and the most consistently underestimated. Inflation risk, market risk, and currency risk are well-recognised by most financially literate individuals. Longevity risk, by contrast, operates silently: there is no market signal, no visible threat, just the gradual passage of time as your retirement stretches beyond what you planned for. This guide explains the scale of longevity risk and the strategies available to manage it.

The Reality of Modern Life Expectancy

Standard life expectancy figures are often misleading for retirement planning purposes. The commonly cited UK life expectancy at birth — approximately 79 for males and 83 for females as of current data — reflects average life expectancy across the entire population, including those who die in their 50s, 60s, and early 70s.

For retirement planning, what matters is conditional life expectancy: how long you can expect to live given that you have already reached retirement age.

A 65-year-old today:

• Has roughly a 50% chance of living to 87 (male) or 89 (female)
• Has roughly a 25% chance of living to 93 (male) or 95 (female)
• Has roughly a 10% chance of living to 98 (male) or 100 (female)

For couples:

• The probability that at least one partner in a couple aged 65 lives to 90 is approximately 45-50%
• The probability that at least one reaches 95 is approximately 20-25%

These figures suggest that a couple retiring at 65 has a roughly 50% chance of needing to fund at least 25 years of retirement for one partner, and a meaningful probability of needing to fund 30 years or more. Planning based on expected lifespan (87 for a male) means there is a 50% probability the plan runs out before death.

The HNW factor. Socioeconomic status is one of the strongest predictors of life expectancy. High-net-worth individuals with access to quality healthcare, lower-stress lifestyles, and professional financial planning tend to live significantly longer than average. For the typical client of an international wealth manager, a planning horizon extending to 95-100 is not excessive — it is prudent.

Why Standard Planning Underestimates Longevity

Longevity risk is systematically underestimated for several reasons:

The planning horizon assumption. Many financial planning models default to a 25 or 30-year retirement horizon. This is reasonable as a minimum but is almost certainly insufficient as a comprehensive plan — it corresponds to death at 90 or 95, at which there remains a meaningful probability of survival.

Optimism bias. Most people expect to live to approximately average life expectancy — they do not naturally imagine themselves as the person who lives to 97. The retirement plan is therefore built around a typical life, not the full distribution.

Focus on early retirement years. The "go-go" years of active, expensive retirement in the 60s and 70s are vivid and imaginable. The "no-go" years in the 80s and 90s — potentially with significant care costs but lower discretionary spending — are harder to plan for realistically.

Care cost neglect. Long-term care costs, which often materialise in the late 70s and 80s, are frequently absent from retirement plans. A residential or nursing care placement costing £50,000-£60,000 per year for two or three years is a very significant financial event that a portfolio must absorb. A plan that has not accounted for this risk may appear sustainable on paper while being fragile in practice.

Strategy 1: Annuity for Base Income

The most direct solution to longevity risk is a lifetime annuity for the income that covers essential expenditure. An annuity pays for as long as you live — five years, twenty years, or forty — making it the only financial product that completely eliminates longevity risk for the income it covers.

The case for a partial annuity. Many retirees are deterred by the loss of capital and flexibility that a full annuity entails. The resolution is to annuitise only the essential income floor — the amount you need to cover housing, food, utilities, healthcare premiums, and other non-negotiable costs — and leave the discretionary spending portion in a flexible drawdown portfolio.

For example, if total annual spending is £80,000, of which £45,000 is essential, a partial annuity covering £20,000-£25,000 (with the State Pension covering the remainder of the essential floor) protects you from longevity risk at the essential level, while the investment portfolio funds discretionary spending. Even if the portfolio is depleted by extreme longevity, the annuity and State Pension continue.

Annuity rates and timing. Annuity rates generally improve as you age, because the insurer expects a shorter payment period. A 75-year-old can typically secure a materially higher income per £100,000 than a 65-year-old. This creates an argument for deferring annuity purchase — securing better rates at an older age — but this must be weighed against the longevity risk in the intervening period while the portfolio remains exposed.

Strategy 2: Phased Drawdown and Deferred Annuity

Rather than making a binary choice between a lifetime of drawdown and a full annuity at retirement, a phased approach combines both:

Phase 1 (65-80): drawdown. The investment portfolio funds retirement income. The portfolio retains meaningful equity exposure, generating growth over the medium to long term. Sequencing risk is managed through a cash buffer and a flexible withdrawal approach.

Phase 2 (80+): annuity. At 80 or 85, convert a portion of the remaining portfolio to an annuity. At this age, rates are significantly better — a 25% or more higher income per £100,000 than at 65. If the portfolio has grown or at least survived reasonably intact over 15 years of drawdown, the remaining capital can fund a meaningful annuity income.

This phased approach has two advantages: the portfolio retains growth potential through the first 15 years of retirement, and the eventual annuity is purchased at better rates.

Strategy 3: Deferred Annuities (Longevity Insurance)

A deferred annuity is a contract purchased today that commits the insurer to pay a guaranteed income from a specified future age — typically 80 or 85. You pay a premium now (considerably lower than a standard immediate annuity, because many purchasers die before payments begin) in exchange for a guaranteed income from the future start date.

The mathematics. A 65-year-old purchasing a deferred annuity starting at 85 pays a premium of, say, 15-20% of the equivalent immediate annuity cost, in exchange for the same guaranteed income from age 85. If they live to 85 and beyond, the annuity provides exactly the longevity insurance needed. If they die before 85, the premium is lost — similar to the cost of any insurance policy that is not claimed.

Deferred annuities are sometimes called "longevity insurance" precisely because they are insurance against the tail risk of extreme longevity, rather than a vehicle for funding early retirement income. They allow the investment portfolio to be managed on the assumption that it only needs to survive to 85 — at which point the deferred annuity takes over — rather than needing to last indefinitely.

Availability. Deferred annuities are less widely available than immediate annuities in some markets. They exist in various forms across different jurisdictions and through specialist providers. International financial planners with access to the full market can identify appropriate products.

Strategy 4: Maintaining Equity Exposure in Retirement

One of the counterintuitive findings of retirement planning research is that portfolios with significant equity exposure throughout retirement have historically outperformed more conservative portfolios over 25-30 year horizons, despite greater short-term volatility.

The intuition against this — "I should not take equity risk at 80" — misunderstands the time dimension. An 80-year-old retiree still potentially has 15-20 years of financial planning ahead of them. Over a 15-20 year horizon, the evidence for equity outperformance relative to bonds is strong.

Practical implications:

• In a pure drawdown portfolio, maintaining 40-60% equities throughout retirement is supported by evidence for those who can tolerate short-term volatility.
• The key enabler is the cash bucket: maintaining one to two years of spending in cash means you are never forced to sell equities at the bottom of a market fall, even in your 80s.
• The equity allocation may reduce with age — moving from 50% at 65 to 40% at 75 to 30% at 85 — but it should not drop to near zero for a healthy retiree in their 70s with decades of life expectancy remaining.

Strategy 5: Cognitive Decline Planning

A specific dimension of longevity risk that is often ignored is the interaction between longevity and cognitive decline. As the planning horizon extends to 90 or 100, the probability of meaningful cognitive decline affecting financial decision-making capacity becomes very significant.

A 30-year retirement that starts with an engaged, capable investor in their 60s may involve a decade or more of significantly reduced cognitive capacity in the 80s and 90s. The financial plan must be built to function during this period — either through professional management under a discretionary mandate, or through proactive simplification.

Key planning steps:

• Establish a UK Lasting Power of Attorney (and equivalent in your country of residence) while capacity is full — typically in your 60s or early 70s.
• Simplify the investment portfolio progressively — by your mid-70s, a complex multi-asset, multi-currency portfolio should be consolidated to a smaller number of diversified funds or a fully discretionary mandate.
• Prepare a written statement of investment principles and income requirements — your wishes for the portfolio when you are no longer able to articulate them.
• Involve a trusted family member in annual reviews from your mid-70s, with your consent, so that any change in capacity is observed by someone who knows you.

Longevity Risk and Estate Planning

The longer you live, the more you will draw on your estate. This is the essential tension between longevity risk management and estate planning: the strategies that protect you from running out of money — particularly annuities — typically reduce the assets available to pass on.

This tension is best resolved by being explicit about priorities. For most retirees, the priority is: never run out of money in a way that creates genuine hardship or dependency. Leaving a large estate is a secondary objective. Given this, building a floor of guaranteed income through annuities, State Pension, and rental income — with a drawdown portfolio for flexibility and an estate residual — is the appropriate balance.

If leaving a substantial estate is a primary objective alongside personal financial security, the plan needs to be more carefully calibrated: a higher initial portfolio, a lower withdrawal rate, and perhaps a life insurance policy held in trust to provide the estate transfer separately from the retirement savings.

How Global Investments Can Help

Longevity risk is best addressed not through a single product or strategy but through a combination: guaranteed income for the floor, flexible portfolio for discretionary spending, deferred annuity or phased conversion for the longer term, equity exposure maintained throughout for growth, and cognitive decline planning built in from the beginning.

Global Investments has been helping internationally mobile clients plan for longevity across 32 years of practice. We model retirement plans to extended horizons, incorporate probabilistic analysis of outcomes across different longevity assumptions, and ensure that the plan is robust not just to the expected case but to the possibility — which is more likely than most people assume — of a very long retirement.

To discuss longevity risk and your retirement plan, please contact us.

This guide is for educational purposes only and does not constitute personalised financial advice. Life expectancy data and financial product availability change. Investment values can fall as well as rise. Always take independent professional advice before making retirement planning decisions.