With life expectancy on the rise, long-term retirement planning is as important as ever

The uptick in life expectancy presents both opportunities and challenges for retirees and those approaching retirement. With potentially longer retirements ahead, individuals must reassess their financial strategies to ensure their nest eggs can sustain them for an extended period.

According to data released in December 2024 by the federal Centers for Disease Control and Prevention, life expectancy at birth in the United States increased to 77.5 years in 2022, up from 76.4 years in 2021. This 1.1-year increase represents a significant rebound following the decline observed during the height of the COVID-19 pandemic.

For retirement planning, however, it's more relevant to consider life expectancy at retirement age. A 65-year-old today can expect to live, on average, an additional 19.5 years. This means that retirement savings may need to last for two decades or more, highlighting the importance of robust financial and estate planning.

Living longer comes with increased financial responsibilities. Retirees must consider:

• Extended retirement income needs.
• Higher potential health care costs.
• The possibility of requiring long-term care.

A report by RBC Wealth Management found that an average 65-year-old couple can expect to spend $683,306 on health care expenses – not including long-term care costs that can reach $100,000 a year or more. This figure underscores the importance of factoring health care costs into retirement planning.

With increasing life expectancy, the risk of outliving one's savings becomes more pronounced. To mitigate this risk, retirees should consider:

• Delaying Social Security benefits. Waiting until age 70 to claim Social Security can result in a benefit up to 32% higher than the full retirement age benefit.
• Adopting a conservative withdrawal rate. The traditional 4% rule may need adjustment. Some financial experts now recommend a 3% or 3.5% withdrawal rate to account for longer retirements.
• Maintaining a diversified investment portfolio. Balancing growth potential with risk management becomes crucial for sustaining long-term income.

Guaranteed income is crucial for retirement planning for several key reasons. First, it provides reliable financial stability when you're no longer earning a regular paycheck. Social Security serves as one form of guaranteed income, but many retirees benefit from additional sources like pensions or annuities to cover their basic living expenses.

A guaranteed income stream helps protect against major retirement risks. Market volatility can significantly impact investment portfolios, but guaranteed income continues regardless of market performance. This becomes especially important as people live longer – having predictable income helps ensure you won't outlive your savings.

Annuities, in particular, can provide a steady stream of income that lasts for life, regardless of how long that might be.

Annuities specifically address one of retirees' biggest concerns – outliving their savings – through a unique contractual guarantee. When you purchase an annuity, the insurance company commits to providing regular payments for the rest of your life, effectively transferring the longevity risk from you to the insurer.

Here's how it works: You pay either a lump sum or make periodic payments to the insurance company during the accumulation phase. The company then provides guaranteed payments during the distribution phase based on factors like your age, life expectancy and the payment option you choose.

The following are examples of annuities that provide lifetime income:

• Single premium immediate annuities (SPIAs) begin payments right away after a one-time investment. The payments can be fixed, providing the same amount each period, or variable, potentially increasing with market performance.
• Deferred income annuities (DIAs) start payments at a future date you choose. Because payments are delayed, you typically get higher monthly payments compared to immediate annuities for the same initial investment.

There are important considerations with annuities, such as fees, liquidity requirements and the impact of inflation on the purchasing power of fixed payments over time. Given these factors, many financial professionals recommend using annuities as part of a broader retirement strategy rather than putting all your savings into them. This provides both guaranteed income and flexibility for other needs.

The likelihood of needing long-term care increases with age. According to the U.S. Department of Health and Human Services, about 70% of people turning 65 can expect to use some form of long-term care during their lives.

Long-term care insurance or hybrid life insurance policies with long-term care riders can help protect against the potentially devastating costs of extended care. These products become even more crucial as life expectancy increases.

A holistic approach to retirement planning considers all aspects of a retiree's life, including health, lifestyle and financial goals. This comprehensive view becomes even more critical as retirements potentially stretch into three decades or more.

Key components of a holistic retirement plan include:

• Regular health check-ups and preventive care to manage health care costs.
• Lifestyle planning to ensure fulfillment and purpose in retirement.
• Ongoing financial education to stay informed about economic changes and opportunities.
• Regular review and adjustment of the financial plan to account for changing circumstances and increasing longevity.

The societal impact of increasing life expectancy extends beyond individual retirement planning. It affects:

• Government policies on Social Security and Medicare.
• Workforce dynamics, with potential for longer working lives.
• Family structures, with multiple generations coexisting for longer periods.

Understanding these broader implications can help retirees and pre-retirees make more informed decisions about their own retirement strategies.

As life expectancy continues to rise, the importance of comprehensive retirement planning becomes increasingly critical. While this demographic shift presents challenges in terms of extended financial needs and health care costs, it also offers opportunities to reshape how we approach retirement. By combining guaranteed income sources, prudent investment strategies and careful long-term care planning, individuals can build resilient retirement plans that adapt to increasing longevity. The key lies in starting early, staying informed and regularly reviewing and adjusting strategies to ensure a secure and fulfilling retirement, regardless of how long it may last.