In case you missed it, Social Security formerly announced that it is broke! And they mean it this time! We have all heard that Social Security is insolvent, so much now that we have grown numb to the headline. But it’s official now. According to the announcement, Social Security is expected to be able to fund only 78% of scheduled benefits in 2034.
That means in nine years, retirees will no longer receive their full-scheduled benefit payments! If you are a 65-year-old scheduled to receive $3,200/month, your payment will be reduced to $2,400/month or less in 2034, when you are 74 years old! If you are counting on Social Security payments as your financial safety net during retirement, you are not adequately prepared for your financial future.
You have Longevity Financial Risk!
Longevity financial risk is the risk of becoming financially insecure as you grow old. Growing old is great; however, paying for it is another story. Social Security can no longer be counted on as your safety net for financial security during old age.
Longevity financial risk is a term you will hear more and more as the number of people reaching 65 in our nation hits its peak in 2025. Many of these individuals have inadequate savings and are at risk. The Center for Retirement Research estimates that Americans are facing a $3.2 trillion retirement income gap, which represents longevity financial risk.
Numerous factors contribute to the emergence of widespread longevity financial risk. The biggest factor is a shift in the modern retirement landscape that requires individuals to fund their own retirement through savings and investments. This shift occurred slowly, over decades, as industry and policy moved the burden of financially supporting retirement from institutions to individuals.
Burdening individuals with funding their own retirement gives rise to “longevity financial risk,” which is a difficult challenge for individuals to solve on their own. Why? Many reasons, but the biggest is that of all the uncertainties of life, predicting how long you will live is next to impossible. Contrast that to how actuaries can predict how long 1,000 individuals will live. In a group of 1,000 individuals, an actuary can confidently predict how many individuals will be alive for how long; they just cannot predict which individuals. This is why retirement funding solutions work well at an institutional level and are very difficult to solve at the individual level.
The uncertainty around individual mortality creates “longevity financial risk” because there is no way to accurately predict how long you will live, let alone how much money you will need. The only thing each of us can say about our own mortality is that we are highly unlikely to celebrate our 122nd birthday, which is the oldest known human. And we are almost certain to wake up tomorrow, although some of us will not. So what do we know other than we have a 99.9% chance of celebrating tomorrow and 99.9% chance of not celebrating our 122nd birthday. How we financially plan for this uncertainty is a very difficult problem for individuals to solve.
Add to this uncertainty of how much money you will need for this uncertain time period, and we have a real puzzle on our hands—one that is not easily solved by most individuals. We know that inflation will erode our purchasing power over time, our healthcare needs and their costs will most certainly increase over time, and the market can be extremely volatile at times, impacting our savings and investments.
This is our longevity financial risk! It is a very real and difficult challenge that a growing number of Americans are now facing as they enter retirement. Understanding that Social Security is not to be relied upon is only the beginning of understanding the scope of your risk and financially preparing for old age.