When it comes to retirement planning, often attention is paid to inflation risks and investments risks, with little or no focus on longevity risks.

There is also the tendency to confuse longevity with life expectancy. Let’s look examine both. Life expectancy refers to the average length of time that an individual is expected to live. In Jamaica current life expectancy is 74.77 years and by 2050 life expectancy is projected to increase to 78.13 years. Longevity is the length of time a person lives. It is defined by the capacity of an individual to live beyond the average age of death.

Longevity risks

Recently I had a discussion with a teacher who is concerned about her longevity. She explained the circumstances of some retired teachers who are struggling in retirement, even though they are receiving a monthly pension income. Her concern is about her own future should she spend 20 years or more in retirement. Having made an assessment of her retirement goals, longevity risks proved to be a real concern for her in planning for retirement. With the world facing the challenges of an ageing population, strategies must be in place to protect retirees. It is best to plan for a long life in retirement than fail to do so and risk running out of funds while enduring reduced purchasing power from a fixed pension income. Long-term investments should be pursued to supplement pension income and protect against longevity risks. The question of retirement lifestyle should be addressed way before retirement. Prudent living should be practised early during one’s working life as this will lead to more funds for saving, investing and retirement nest egg. The habit of being prudent should continue in retirement and will guard against the longevity risk of outliving one’s money.

Do you want to outlive your money? I am sure no one wants that. Your money should outlive you. Pension companies and insurance entities encounter longevity risks, when projections made regarding life expectancy and mortality rates are proven to be erroneous. Financial advisors and retirement planners must view longevity risk as a long-term one. Since pension funds such as defined benefits and defined contribution plans offer life long income in retirement, they face increasing longevity risks.

What is a Defined Benefit plan?

It’s an employer sponsored pension plan that provides employees with guaranteed pension income for life. Whereas, a defined contribution plan allows contribution primarily from the employees while employers may match the employees’ contribution up to a specified amount. The retirement income is determined based on the employees’ regular contributions and the investment earnings from the funds. The responsibility of saving and investing is shifted from the employer to the employee. Over the years, many employers have switched from a defined benefit or superannuation plans to individual pension plans, and encouraging their employees to contribute to personal pension plans known as individual retirement scheme (IRS) or approved retirement plan (ARP).

Personal pension plans are impacted by greater longevity risks as employers’ contributions are not mandatory. More employers should consider contributing to the employees’ personal pension plans as this would help to reduce the longevity risks. With an ageing population and increase lifespan more retirees are at risk of outliving their retirement savings, which worsens the longevity risks.

When retirees live longer than they expected, the situation arise where they are no longer able to maintain their retirement lifestyle. I recall an 81-year-old retiree who didn’t consider the impact of longevity risk on her savings.

At age 65 she encashed her insurance policies and spent the proceeds. Now in her 80s she regrets that she didn’t invest the funds, a mistake many retirees make is assuming wrongly how long they will live.

The lump sums from their pension funds and insurance policies seem like a windfall at age 65. They didn’t bargain that they might outlive their money. Retirees and financial advisors should realise that retirement planning does not stop when the retiree reaches retirement. The retirement years require lifetime adjustments, ongoing assessment and financial strategies to meet new financial goals or to amend existing plans

Who knows the economic climate that may exist in the first three years of retirement? Will there be a recession and how long will it last? A well-diversified financial plan needs to be in place to minimise longevity, inflation and market risks. The impact of longevity risks begins when the pension contributor starts a pension plan and it ends when that individual dies. Therefore, it’s important to plan as if you expect to spend great many years in retirement.

— Grace G McLean is financial advisor at BPM Financial Limited. Contact her at gmclean@bpmfinancial. and visit the website: www.bpmfinancial.com. She is also a podcaster for Living Above Self. Email her at livingaboveself@gmail.com