Tips For Managing "Longevity Risk"

Five Tips for Baby Boomers Planning for their Retirement from the WSJ:

1. Planning doesn't guarantee perfection, but not planning virtually guarantees failure.

2. To plan for a fulfilling retirement, think of true fitness as a three-legged stool; physical fitness, mental fitness and financial fitness.

3. At some point ROI will mean Reliability of Income to each of us, no just Return on Investment. Select products that create that reliability.

4. One asset is directly tied to your living: longevity insurance. As a trusted financial adviser about guaranteed lifetime income annuities.

5. Products with some equity participation with no risk to principal are smart choices. Otherwise, extended bear markets can devastate assets, regardless of the best laid plan.

The above tips come from Aviva Insurance chief Richard Harvey hence the focus on insurance. However in retirement planning insurance is not a bad thing to emphasize. This is not the same insurance focus as previous generations where the primary role of insurance was to protect people from dying too young. Today's baby boomer generation has another, perhaps greater financial worry, which is living too long (aka "longevity risk").

Of course there is an entire ecosystem growing up around protecting you from longevity risk--from bankers to financial planners. But the combination of: a) living longer; b) skyrocketing health costs; and c) uncertainty surrounding entitlement programs such as Social Security and Medicare make longevity risk an important area for individuals to address. It's telling that the insurance chief above calls longevity risk one of their "biggest business opportunities."

He estimates that Americans, Canadians and Europeans have around $10 trillion socked away for retirement. Seems like enough money. However, and using the U.S. as an example, the average life expectancy is about 78 years old. But this is an "average" and the longer you live the longer you are likely to live. When you hit 65, you have a 50% chance of living another 20 years. Which means at that traditional age of retirement one will want to have planned for at least that amount of time and probably more. When you multiply that amount by the tens of millions of baby boomers entering the retirement years, a trillion just doesn't go as far as it used to.