Don't Fret Over Outliving Your Money

10/03/2013 12:00 pm EST

Focus: RETIREMENT

Howard Gold

Founder & President, GoldenEgg Investing

Will you have saved enough by the time you retire, or will you run out of money, or not even have enough to retire in the first place? MoneyShow's Howard R. Gold urges you to not worry as much about that and focus on certain kinds of annuities instead.

You've probably seen the ad: Harvard happiness expert Dan Gilbert asks people who's the oldest person they've known. He gives them all blue stickers, which they slap on a wall with an age timeline that skews heavily to the 90s and beyond.

“A lot of us have known someone who's lived well into their 90s, and that's a great thing,” said Gilbert.

“The question is, how do you make sure you have the money you need to enjoy all of these years?”

That 30-second commercial, which ran during the last Super Bowl, was for Prudential.

But it could have been posted by any financial services company that routinely warns its customers about outliving their money. Their main message: Unless you save a lot more and invest it with us, you'll be living in the street and eating cat food when you're 95.

That focus on, even obsession with, people outliving their money has led to some bad outcomes. To ensure that their money will grow over a long lifetime, financial advisers recommended clients keep 60% or more of their assets in stocks even as they neared retirement—just in time for the 2008-2009 market crash.


That's when investors learned the hard way there are more risks than just living too long. There's market risk, inflation risk, and the risk of serious illness that could empty your nest eggs. And then there's the biggest risk—not saving enough money to retire at all.

This year, a poll by HSBC revealed that nearly one in five Americans don't expect to retire, and that 56% think they're not doing enough—or are doing nothing at all—to prepare for it. Teresa Ghilarducci of the New School for Social Research reported that 75% of Americans nearing retirement age have less than $30,000 in retirement savings. Longevity risk is the least of their worries.

And yet financial services firms routinely overstate it. “These ads and the insurance companies are taking this way too far,” says Moshe Milevsky, a professor at York University in Toronto, who has been studying retirement issues for 20 years.

True, life expectancy is increasing—American men who turn 65 now will live 18 more years, on average, while women of the same age will live an average two more decades. And the number of people over 90 has tripled since 1980 to 1.9 million in 2010. By 2050, some eight million are projected to join the nonagenarians' club.

But that would still be only 10% of Americans 65 and over, compared with around 4.7% now, according to the Centers for Disease Control. And among that group, women outnumber men three to one.

NEXT: Too many eggs in the longevity basket

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So, although your chances of living to 90 aren't trivial, they're pretty low, especially if you're male. And as Milevsky points out, the mortality tables used by the Social Security Administration are “way more pessimistic than the tables used by insurance companies to sell annuities”—by five to ten years.

So, should you really be putting so many eggs in the longevity basket?

“It's something you have to be aware of—people face a trade-off…,” he told me.

“It's a risk, like any other risk. How many chips do I want to allocate to that?”

Other risks are more immediate and may be more serious. While inflation isn't a problem now, it has been in the recent past, yet investors have several ways to protect themselves against it without loading up on stock (Treasury Inflation Protected Securities, or TIPs; iBonds and of course, gold).


And then there's market risk, which hit investors twice in the past decade. Taking a huge hit from a plunging market just as you're retiring may be the biggest risk you face, because the amount you can withdraw each year is immediately reduced and it could cut your living standards for the rest of your life.

“It's about probability versus magnitude—and that's one of the biggest mistakes the financial services community [makes],” said Milevsky, explaining that seemingly low-probability events like market crashes have an outsized impact. "If you do run out of money, it'll be early and it'll be severe.”

That's why the financial services industry's cure for the problem of outliving your money—putting more of your money into stock—turned out to be worse than the disease.

As I've written here several times, I think people should put less money into stock—no more than 50% if you're less than a decade away from retirement, and no more than 40% of your assets once you've retired.

And you can consider certain kinds of annuities that address longevity risk, especially if you're a woman, or have parents, or grandparents who've lived into their 90s. (To get an estimate of your own potential life span, try Livingto100.com. No guarantees, of course.)

You can buy these products just before or after you retire and lock in a certain income once you hit 80 or 85, God willing. Consumer Reports had a good rundown on several of them here. But whatever you buy, make sure it gives you a steady payout.

“I'm a big fan of an annuity that looks like, smells like, tastes like a pension,” Milevsky says.

Me, too. If you also have some inflation protection and lower your market risk, you're ahead of the game. So, stop worrying about living too long and enjoy the ride—we only go around once.

Howard R. Gold is editor at large for MoneyShow.com and a columnist for MarketWatch. Follow him on Twitter @howardrgold. The World MoneyShow Toronto is only three weeks away, for more information, and to register for FREE click here...