Longevity Risk: Protecting Your Retirement Income

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 Longevity risk—the possibility of outliving your retirement savings—is the single biggest threat facing retirees. David Blanchett, head of retirement research at PGIM DC Solutions, explains that without knowing how long retirement will last or how markets will perform, it’s impossible to gauge how much you can safely spend. This uncertainty keeps many people from enjoying their hard‑earned savings in retirement.

Michael Finke uses a birthday‑cake analogy to illustrate longevity risk. If you don’t know how many guests will show up, you start cutting smaller slices to make the cake last. The same thing happens with retirement savings: retirees often underspend because they’re worried the money won’t last. Social Security functions like “cake insurance”—a guaranteed slice delivered every year—providing a base level of income that eases that worry.

Blanchett defines “lifetime income” as income guaranteed for life, such as Social Security, pensions or annuities. Research shows retirees are much more comfortable spending these guaranteed payments than drawing down wages, investments or savings accounts like 401(k)s and IRAs. People will spend a pension or annuity check freely but hesitate to tap their investment portfolios, often leaving those balances untouched.

Increasing lifetime income leads to more confident spending in two ways. First, the more guaranteed income retirees have, the more they will spend it. Second, when retirees know essential expenses are covered by lifetime income, they become more willing to draw from other assets. For example, delaying Social Security from age 67 to 70 can significantly boost monthly benefits, providing a stronger income foundation.

One practical way to boost lifetime income is through a lifetime income annuity. This product works like Social Security: by paying an upfront premium, you receive a guaranteed income stream for life. Finke cites a woman who, after investing 40% of her $1 million savings into an annuity, increased her monthly income by $2,500 in addition to Social Security. Knowing that at least $3,500 would arrive every month allowed her to enjoy retirement without fear of running out of money. More lifetime income, whether from Social Security, pensions or annuities, leads to greater satisfaction and peace of mind in retirement.