Managing Longevity Risk

Article submitted by David Morrison, a Financial Advisor in Greenwood Village.
For more information, he can be reached at 303-793-3074.

Today there is a new type of risk facing investors: longevity risk. Statistics from the Society of Actuaries show that for a healthy couple aged 65, at least one spouse has almost a 50% chance of living to the age of 95, meaning that a 30-year retirement may be a distinct possibility. This raises a critically important question, "Will I outlive my money or will my money outlive me?"

The first step in assessing your personal longevity risk is figuring out how much you can realistically afford to withdraw each year from your savings and investments. One strategy is to withdraw a conservative 4% to 5% of your principal each year. As you review your own situation, consider these additional strategies:

Maintain a cash cushion for living expenses. A common rule of thumb is to keep 6 to 12 months of living expenses in an interest-bearing savings account, though your needs may vary. With interest rates trending upward, you might consider keeping more money in short-term Certificates of Deposit.

Use bonds to generate income. "Laddering" of bonds can potentially create a steady income stream while helping reduce long-term interest rate exposure. Bonds do contain risk, which you should consider carefully prior to purchase.

Stocks potentially offer the opportunity for supplemental income by paying part of their earnings to shareholders on a regular basis. Plus, dividend-paying stocks are currently taxed at a maximum rate of 15%, rather than ordinary federal income tax rates, which can run as high as 35% (consult your tax professional; this rule is scheduled to expire after 2008 unless extended by Congress).
Keep an element of growth in your portfolio. Finally, try not to be overly conservative with your investments. If you do live 30 or more years in retirement your portfolio may need a boost:

Consider dividend-paying equities. Here is a dividend-paying link. Visit fc.standardandpoors.com/srl/srl_v35/glossary.jsp?#000117 to learn how stocks outpace inflation over the years.