Living to 95: how longevity risk figures into the annuity question

Almost every retirement plan contains a quiet assumption about how long the plan has to last. Some people pick an age like 85 because it feels far away. Others ask a calculator and plan to the answer. Both approaches can leave a retiree short, because a plan that works only if you die on schedule is not a plan for a long life. Longevity risk is the risk that you live longer than your money. Annuities are one of the tools built to address it, and they are also frequently oversold as the answer to it.

The questions below are the ones people tend to ask when they first connect the two ideas. The numbers are round figures invented for illustration, not statistics about any population and not product terms.

The problem with planning to an average

What is longevity risk, in plain terms?

It is the possibility that you outlive your savings. Nobody knows how long they will live, so nobody knows how long their savings must last. If you plan for 20 years of retirement and live 30, the last ten years are funded by whatever is left, which may be nothing. If you plan for 30 years and live 20, you spent less than you could have and left the remainder to your heirs. The two errors are not equal: running short in your late eighties is much harder to repair than leaving a larger estate than you intended, because you cannot easily go back to work, and your costs, including care, may be rising.

Longevity risk is also different from market risk. Markets can recover; time cannot be added back. A long life stretches every other risk, including inflation, health costs and the chance of a bad stretch of returns.

Why does average life expectancy mislead?

An average is the middle of a spread, and about half the people in any group live past the middle. The life expectancy you see in a table or calculator describes a population, not you, and it says nothing about how wide the spread is around it. A person with a life expectancy of 85 has a real chance of reaching 95, and a plan built for 85 fails in exactly the case where the money is needed most.

Two further problems make planning to the average worse. Life expectancy tables describe people at a given age, and the figure rises as you survive, so a person who is 80 has a longer expected remaining life than the figure quoted at birth would suggest. And for a couple, the relevant period is not either person's life but the longer of the two lives.

How likely is it that at least one spouse reaches 90?

Say, purely as an illustration, that each of two spouses has a 40% chance of reaching 90. If their lifespans were independent, the chance that neither reaches 90 is 0.6 × 0.6 = 0.36, so the chance that at least one does is 1 − 0.36 = 64%. Even if each spouse had only a 30% chance, the chance that at least one reaches 90 would be 1 − 0.7 × 0.7 = 51%.

Real lifespans are not independent: couples share lifestyle and often age together, so the true figure can differ. The point of the arithmetic is the direction. A household's plan has to cover the longer of two lives, which is why survivor features matter so much in income annuities and pensions, as the post on pension decisions discusses. The life expectancy calculator can give you a planning age for each person to start from.

How an annuity shares the risk

How does an annuity pool longevity risk?

A life annuity collects money from many people and pays each of them for as long as they live. Some die early, and some live very long. The money that would have gone to those who died early helps pay those who live long, so the insurer can promise lifetime income without having to set aside enough for every person to reach 100.

Here is the idea in a deliberately simplified example, with no interest and no expenses. Say a retiree wants $30,000 a year from age 65 and wants to be safe to age 100. Funding that alone takes 35 years × $30,000 = $1,050,000. Now say the insurer expects the average member of a large pool to collect for 22 years. Then it needs, on average, 22 × $30,000 = $660,000 per member. Each member buys a lifetime promise for roughly $660,000 instead of $1,050,000, and the ones who live to 100 are paid out of the contributions of those who did not. Real pricing includes interest, expenses and the insurer's margin, which this arithmetic leaves out. The guide to single premium immediate annuities covers how payouts are set, and the annuity payout calculator shows how age and payout form change a check.

What are mortality credits?

Mortality credits are the economic benefit of the pooling above. When members of an annuity pool die, the unpaid portion of what they contributed stays in the pool, and the survivors effectively receive it as part of their payments. This is why a life annuity can pay a higher income than a bond with the same safety and interest could pay for life: the extra comes from the people who did not live to collect. The effect grows with age, as the risk of dying in any given year rises, which is why people who annuitize in their seventies or eighties get a bigger boost from it than people who buy in their fifties. Mortality credits are not a bonus the insurer adds; they are the arithmetic of sharing a risk that individuals cannot diversify on their own.

What does it cost to insure against living a long time?

The cost is not a fee line. It shows up as lost flexibility and lost legacy:

• The principal is gone. With an immediate life annuity, you generally cannot get the lump sum back after the free-look period.
• Early death forfeits the value. If you die early, a life-only contract pays nothing further. Refund or period-certain features protect heirs but lower the income, as the guide to annuitization and payout options explains.
• Inflation erodes a level check. Unless you pay for a cost-of-living adjustment, a fixed payment buys less each year. The post on a flat annuity check and inflation quantifies this.
• You depend on one insurer. State guaranty associations offer a backstop up to limits that vary, so a large purchase deserves a check of the insurer's financial strength and your state's limit.

Other tools and how much to rely on an annuity

Is an annuity the only way to cover a long life?

No. Several other tools reduce longevity risk, each with its own costs.

• Delaying Social Security. Monthly benefits rise for each year you wait to claim, up to age 70. That is inflation-adjusted lifetime income from the government, and for many households it is the cheapest longevity insurance available. The decision is personal and depends on your health and your spouse's, and the Social Security Administration can give you your own numbers.
• Working longer or part-time. Even modest earnings in your late sixties can extend a portfolio for years.
• Flexible spending. A plan that can trim discretionary spending after a bad market year survives more situations than a plan that cannot.
• Home equity. A paid-off home is a reserve, though it is not always easy to tap.
• A pension. If you have one, it already contains the longevity protection.
• Diversified investments with a sensible withdrawal rule. A portfolio can last a long time without an annuity, but it carries market risk, which is the subject of the post on sequence-of-returns risk.

An annuity is one tool among these. The guide to are annuities a good idea? sets out the case for and against.

How much of my savings should go toward guaranteed income?

There is no correct percentage, but there is a method many planners use: cover essential spending with sources that last as long as you do, and let the rest of your assets take market risk.

Here is a worked example with invented numbers. Essential spending (housing, food, insurance, utilities, taxes) is $48,000 a year. Social Security brings in $30,000 and a small pension $6,000, so the essential gap is $48,000 − $30,000 − $6,000 = $12,000 a year. If an income annuity paid an illustrative 7% of the premium at the buyer's age, the premium to close the gap would be $12,000 ÷ 0.07 = about $171,429. That is a number to price against real quotes, not a quote. The remaining savings could then fund discretionary spending, travel and gifts, with the flexibility to cut back when markets are down.

Someone whose Social Security and pension already cover essential costs may not need any annuity. Someone with no pension and a modest Social Security benefit may find the gap large.

Health, gender and couples

Does health change the answer?

Yes, in both directions. A person in poor health has a shorter expected life, so a life annuity is a worse bet for them: the premium buys fewer expected years of payments. Most ordinary income annuities are priced by age and sex where state law allows, not by health, so people in good health tend to get more value from them. Specialized "impaired-life" annuities exist for people with serious conditions and can pay more. A healthy person with long-lived parents, by contrast, may find the annuity's pooling especially valuable. Family history is a clue to your own odds, not a prediction.

What about women, men and couples?

On average, women live longer than men, which is one reason prices differ in products that allow sex-based rates and one reason women often face a longer retirement with less savings. For couples, the joint-and-survivor design discussed above is the standard way to protect the second person. A survivor option costs a lower starting payment; the glossary entry explains the mechanics.

Special designs and related risks

Where do deferred income annuities and QLACs fit?

A deferred income annuity pays nothing for years, then begins at a chosen age. Because the insurer holds the money longer and many buyers die before payments start, the income per dollar is high. A buyer who is comfortable spending savings carefully until about 80 or 85 can use one to cover only the very late years, as the guide to Deferred income annuities (DIAs): longevity insurance explained describes. A qualified longevity annuity contract is a version bought with retirement-account money that can reduce required distributions; see qualified longevity annuity contracts. Both put a smaller amount to work against the part of life that is most uncertain, in exchange for losing the money if you die before they pay. The guide to annuity laddering covers buying in stages.

Should I wait for a higher payout before buying?

Payouts per dollar rise with age, because the insurer expects to pay for fewer years, and that fact leads some people to wait. The trade is real in both directions. Waiting leaves your money exposed to markets and to your own spending in the meantime, and it means you start collecting later, so you give up the early payments. The payout also depends on interest rates when you buy, which can move either way. Because nobody can time that, some buyers spread purchases over several years, as the guide to annuity laddering explains. Others buy a deferred income annuity now and skip the wait altogether. Waiting is a decision with its own risk, not a free option.

What happens if the insurer fails?

An annuity is a promise from one company, and the promise may have to last thirty years or more. If the insurer fails, the state guaranty association system steps in with protection up to limits that vary by state. According to the National Organization of Life and Health Insurance Guaranty Associations, as cited in the annuity guides on this site, most states cover at least $250,000 of annuity present value as of June 1, 2025, so a larger purchase may exceed the protection in your state. Many buyers check financial strength ratings from several agencies and consider splitting a large purchase between insurers. The backstop is a reason for some comfort, not a reason to skip the check.

Is longevity the same thing as running out of money to pay for care?

Not exactly, though they overlap. A long life raises the chance of needing care, and care can cost far more than ordinary living expenses. A lifetime income stream helps pay for care but does not by itself cover a large spike. Long-term care insurance, a hybrid policy or a plan to use home equity address that different risk. Treat it as its own line in the plan.

Putting it into a plan

What does planning for a long life actually require?

It does not require buying any particular product, and it does not require spending less today for the sake of a fear. It requires four things:

1. A planning age beyond the average. Many planners work toward 95 for one member of a couple, or an age where the chance of surviving is small but not zero.
2. A floor. Know what combination of Social Security, pensions, annuity income or stable assets covers your essential costs for as long as you live.
3. A way to adjust. Decide in advance what you would cut if returns disappoint.
4. Review. Check the plan at least annually and after major events, because both your health and your markets will change what you know.

A fee-only planner, who is paid by you and not by commissions, can model these with your own numbers.

Key takeaways

• Longevity risk is the chance of outliving your money; planning to average life expectancy fails in the cases where the money is most needed.
• For a couple, the plan must cover the longer of two lives; in the invented example, two spouses each with a 40% chance of reaching 90 give a 64% chance that at least one does.
• Annuities pool this risk through mortality credits, in exchange for giving up the lump sum and, with life-only designs, any legacy.
• Delaying Social Security, flexible spending, working longer and a pension are other ways to cover a long life; an annuity is one tool, not the only one.
• A practical method is to cover the essential-spending gap with lifetime income and let other savings carry the flexible spending, then review each year.