The Finance Of Longevity

Insuring Against The Risk of Living Too Long

How advisors can lower the frequency and severity of life’s perils

by Herbert K. Daroff, J.D., CFP, AEP

Mr. Daroff is a contributing editor to Advisor Magazine, and is affiliated with Baystate Financial Planning, in Boston. Visit

In the middle 1980s, the biggest concern that American retirees expressed was “dying too soon,” before they had the time to create wealth for those they left behind. Just a decade later, their biggest concern had become, “living too long,” outliving their financial assets. Today, the biggest concern about running out of money before they run out of breath is the impending cost of medical and custodial care. But, what are some of the other risks? Certainly, negative returns on retirement savings is another significant risk. What can you do?

Risk management, in general, is the process of lowering the frequency and severity of perils. Some risks you choose to retain. Others, you insure against potential losses. There are also hedging strategies and some opportunities to transfer or shift risk to others. Here is a page that I use in the Risk Management course I teach at Bentley University in Waltham, MA.


Peril: Running out of cash flow for one or more years during retirement

Principal exhausted

due to major illness or injury

HIGHHIGHMove in with childrenPurchase Medicare supplement and Long-term care insuranceLook for roommatesMedicare and Medicaid
Principal reduced such that purchasing power during the remainder of retirement is diminishedHIGHLOWReduce retirement lifestyle (take fewer trips).   Lower standard

of living

Purchase annuities (fixed and variable) to provide income for necessities (food, clothing, and shelter) and life insurance to access cash valueLook for sales on food. Buy in bulk.Move in with children or roommates
Down market such that withdrawals this year will adversely affect all future years’ cash flowLOWHIGHReduce retirement lifestyle (take fewer trips).   Lower standard

of living

Purchase annuities (fixed and variable) to provide income for necessities (food, clothing, and shelter) and life insurance to access cash valueLook for sales on food. Buy in bulk.Move in with children or roommates
Current year cash flow insufficient for lifestyleLOWLOWDip into principalAdjust asset allocationAdjust asset allocationShare expenses with others. Ask children for money.


How do you feel about:

  • Moving in with your children? This option is rarely popular.
  • Taking in a roommate? More and more, retirees co-habit after a spouse dies. They share expenses, and more.
  • Reducing your standard of living now so that you can save more for later. This option is not very popular, but should be considered.
  • Reducing your standard of living in retirement. Also, not popular, but may become necessary if you have not properly planned.

In every year during retirement, tax brackets can either be up or down and investment returns can either be up or down. Traditional retirement accounts (IRA, 401(k), etc.) work very well in down/up years (tax brackets are lower than they were when you funded the retirement accounts and markets are up). Funding Roth accounts works well for up/up years when tax brackets are higher than they were when you contributed the funds. However, neither traditional retirement accounts or Roth accounts were well in down market years, unless you take advantage of the investment hedges available from variable and indexed annuities.

Annuities provide a source for income, but are especially useful in down/down years, with lower income taxes on the distributions and less concern about investment market performance. Variable annuities with lifetime benefit riders provide a hedge against down markets. Cash value from life insurance works well especially in up/down years, and certainly in years that follow down markets. It’s called “sequence defense”. And, adding access to death benefits during lifetime for long-term care expenses on your life insurance helps manage the risk of needing custodial care.

Tax RatesMarket PerformanceBest Source for Income
DOWNUPTraditional retirement accounts
UPUPRoth retirement accounts
UPDOWNCash Value


You must remember to take required minimum distributions even in down markets to avoid the 50% excise tax. But, by having all four of these retirement accounts, in addition to your traditional assets under management and savings accounts, you can reduce at least some of the risk of your account value going to zero before your blood pressure goes to zero.

As I have written before, it is unlikely that you will run out of money. Most financial plans show people continuing to cover all of their projected expenses even as their portfolios are getting decimated. It is more likely that they will reduce their standard of living or move in with their children or take in a roommate before they let their funds completely dry up.
Lastly, back to life insurance. The death benefit provides the source of funds to pay the income taxes on a Roth conversion for a surviving spouse. Inherited IRAs cannot be converted to a Roth. But, spousal IRAs can. Death benefits, in general, provide a surviving spouse with a larger source of income and enables the couple (before one spouse dies) to access principal without guilt, knowing that it will be replenished when one dies. ◊