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Risk IV; Longevity Risk October 2, 2008

Posted by shaferfinancial in Uncategorized.
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Among the assumptions we make in our lives, is how long we are going to live.  I am not going into whether one should be pessimistic or optimistic about getting old, but will say that this risk is often not thought about except of course when those pesky life insurance sales people are banging on your door.

Longevity risk is the repercussions of living to short a life to create assets for one's family or the risk of living too long for one's accumulated assets. Both, have drastic repercussions, but have very different risks. A 35 year old male has a super low .16% chance of dying. Even at 50 the chance is only .56%. While there is a greater than 90% chance of someone outliving their money. This skewed risk pattern requires real clear thinking about personal finance. Clear thinking that most insurance agents and financial planners fail at!

Not until age 59 does the chance of dying move about 1%, it goes above 2% at 67, 3% at 71, and then starts up a steep slope breaking 10% at age 84. Now you know one of the reasons term life insurance is so cheap! The other is that people tend to drop the insurance after a couple of years. The life insurance company rarely (less than 1%) pays out on their term policies. Yet, life insurance agents and financial planners are always pushing term life insurance.

But the real and present danger for folks is the other side of the coin. The likelihood of running out of money before you die. We have record numbers of people having to work well into their 70’s; not because they are bored, but because they have to in order to have a place to put their head down at night or buy gas or buy food! This risk is real and present danger that anyone can see around them, yet not really dealt with by most people!

Regular readers of this blog, recognize I talk about this risk all the time.  In fact it might even be my primary directive to help people understand this risk and guide them to a wealth building plan that will eliminate it!