Life expectancy statistics are often misread in retirement planning. An average lifespan isn't a target to plan toward — by definition, roughly half of retirees will live longer than average. Planning for the average, rather than for the possibility of living well beyond it, is one of the more common and consequential mistakes in retirement income planning.
What longevity risk actually means
Longevity risk is the risk of outliving your savings — not a health risk, but a financial planning risk that grows the longer a retirement lasts. A retirement portfolio built to comfortably last 20 years can come under real strain in year 25 or 30, particularly if early withdrawals coincided with a period of poor investment returns (a related concern often called sequence-of-returns risk).
Why this risk is easy to underestimate
- Averages hide the spread. A 65-year-old today has a reasonable chance of living into their late 80s or 90s, particularly if they're already in reasonably good health — the average masks a wide range of individual outcomes.
- Couples compound the risk. For a couple, the relevant number isn't either individual's life expectancy — it's the probability that at least one of them lives to a very old age, which is meaningfully higher than either person's individual odds.
- Costs don't stay flat. Healthcare and care-related costs, in particular, tend to rise later in retirement, often exactly when a portfolio has had the most time to be drawn down.
Tools used to manage longevity risk
Several approaches exist, often used in combination rather than alone:
- Delaying public benefits. Both CPP/OAS in Canada and Social Security in the U.S. increase the ongoing payment for delaying the start, which can function as a form of longevity protection — a larger guaranteed payment that lasts as long as you do, purchased by drawing more from savings in the early retirement years.
- Guaranteed-income products. Certain annuity structures are built specifically to address longevity risk — some designed to begin payments later in life, precisely to cover the years a standard portfolio might otherwise run short.
- Flexible withdrawal strategies. Rather than withdrawing a fixed amount every year regardless of market performance, some retirees use withdrawal approaches that adjust with portfolio performance, reducing the odds of depleting savings too early.
- Maintaining some growth-oriented investments. Shifting a retirement portfolio entirely to conservative holdings at retirement can itself increase longevity risk, since a portfolio with no growth component may not keep pace with decades of inflation.
A simplified scenario
Consider two retirees, both 65, both with the same savings. One plans as if retirement will last 20 years — to age 85 — and withdraws accordingly. The other plans as if it could last 30 years — to age 95 — building in more conservative withdrawals and delaying public benefits slightly to increase the guaranteed portion of their income. If both live to 90, the first retiree's plan runs into real strain in the final years, while the second's holds up, simply because the planning assumption matched reality more closely. Neither retiree could have known in advance which assumption was correct — which is exactly the point of planning for the longer, less convenient possibility rather than the average one.
Healthcare and care costs deserve their own line item
Longevity risk isn't just about running out of income — it's often specifically about running out of income after healthcare or long-term care costs rise later in retirement. These costs, in both Canada and the U.S., tend to increase with age and can accelerate sharply if ongoing care becomes necessary. A retirement plan that accounts for a rough estimate of these costs (even a conservative placeholder figure) tends to hold up better than one that assumes healthcare costs will stay similar to a retiree's 60s throughout their 80s and 90s.
A risk that's manageable, not avoidable
Longevity risk isn't something to eliminate — living a long life is, after all, the outcome most people want. It's something to plan around, by building a retirement income structure that holds up whether a retirement lasts 20 years or 35. Because the right combination of tools depends heavily on your specific savings, health, and other income sources, this is squarely a conversation for a licensed professional rather than a generic formula.