Actuarial Assumptions, Longevity Risk, And Your Retirement Income

​Let’s start with the definition of actuarial assumptions from Investopedia,

“An actuarial assumption is an estimate of an uncertain variable input into a financial model, normally for the purposes of calculating premiums or benefits.  For example, a common actuarial assumption relates to a person’s lifespan, given their age, gender, health condition and other factors.”

​​I have worked with actuaries for many years in my career.  First, as president of life insurance companies when we deliberated over benefits, premium, payouts etc. The actuary was the sound voice of reason that kept us in a profitable mode.   I also worked with actuaries when contracted to
develop products for insurance carriers.  Again, in most cases, the numbers don’t lie - that’s why we need the actuaries. 

​So, why is it that we as human beings tend to ignore the actuarial tables when we look at our life expectancy and calculate how long our retirement funds will last?   Maybe it’s because we have anecdotal  evidence of premature deaths of people we have known.  I have also witnessed the early deaths, but the actuarial tables show the big picture.  And, chances are you are going to live longer than you might think.  So, I ask you... how lucky do you feel?

Let’s go to Wikipedia and look at the definition of longevity risk, “A longevity risk is any potential risk attached to the increasing life expectancy of pensioners and policyholders, which can eventually result in higher pay-out ratios than expected for many pension funds and insurance companies.”  They go on, “One important risk to individuals who are spending down their savings is that they will live longer than expected and thus exhaust their savings dying in poverty or burdening relatives.  This is also referred to as “outliving one’s savings” or “outliving one’s assets.”  So, what does this mean?  Let’s explore…

First off, we all feel good about Social Security being there (at least for baby boomers) and can count on that as one source of income. Some of us are also lucky enough to have a pension.  And, in most cases, that payout won’t be in danger (unless the institution is in serious financial distress).  But what about the rest of your money?  What about the essential income needs: housing, medical, taxes, insurance, food, etc?  Is there enough cash flow?  We then look at discretionary needs... vacations, gifts, new cars or whatever.  How about that source of funds? Is it in good shape?  Let’s look at few factors and a solution to help you sleep better at night.

Okay, pull out your driver’s license and look at your date of birth.  Are you at the age where you should be shouldering high levels of risk in your portfolio?  Only you can answer that… but the answer is probably no.  If you are withdrawing funds in this low interest environment, this could affect how long the funds will last unless you reduce withdrawal amounts.  What about your money in equities? If you are like me, you’ve been enjoying the ride.  But, will there be a day when the markets will decline?  I don’t think I even have to wait for your answer.  If that becomes the case, then your portfolio could become very damaged and the amount of your income would have to be reduced or curtailed for a while.  Is there an answer?  Yes…

There are annuities available which will provide you with an income for life... regardless of interest rates or market turmoil.  These annuities allow you to participate in the potential of growth while taking distributions.  Many also provide access to funds, on top of your distributions, to be used in the case of emergencies or opportunities.  And finally, you are guaranteed to never lose a penny of principal or previous gains even in the case of a market turndown.

So, there you have it. The actuaries say that the risk is there.  The result can be painful, but there’s an answer to this risk, and it will allow you to sleep like a baby.  All you have to do is inquire and check it out.  Want to know how this can be personalized to your portfolio?  Contact me and I’ll give you some safe money solutions.

---

About the Author: Raymond J. Ohlson CLU, CRC, CEO & President of The Ohlson Group, Inc. and SMP International, LLC     
'                                       
Mr. Ohlson entered the insurance business while completing his Bachelor of Science Degree at Ball State University.  He quickly qualified for the Million Dollar Round Table (MDRT) of which he is a Life Member.  He also received his Chartered Life Underwriter (CLU) designation from the American College in Bryn Mawr, Pennsylvania.
​
Mr. Ohlson, a former life insurance company president, currently sits on college and hospital boards and is a published author.