Longevity Risk: Planning for the Possibility of Living Longer Than Expected

When financial planners talk about retirement risk, they typically focus on sequence-of-returns risk (the danger that a market crash early in retirement depletes your portfolio before it can recover) and inflation risk (the danger that rising prices erode the purchasing power of your savings). Both of these risks are real and important.

But the risk that is most consistently underestimated — and that can be the most financially devastating — is longevity risk: the possibility of outliving your money.

Medical science continues to advance. Preventive healthcare has improved. Lifestyle factors for many HNW individuals — access to quality healthcare, good nutrition, low physical stress — tend to improve longevity compared to population averages. The people most likely to read this article are, statistically, likely to live longer than the population median suggests.

The Numbers Are More Challenging Than You Think

A 65-year-old in good health in the UK today has approximately a 50% probability of reaching 85 and approximately a 25% probability of reaching 91. These are not fringe scenarios — they are the median and upper quartile of the distribution.

For a couple, both aged 65, the probability that at least one of them survives to age 92 is approximately 50%. Plans built around a 20-year retirement horizon (to age 85) are adequate for perhaps half of all retirees; the other half will need to fund a longer period.

This matters enormously for drawdown planning. At a 4% drawdown rate from a £1 million pension pot — withdrawing £40,000 per year — and assuming zero real return (inflation-matching), the pot is exhausted after 25 years (age 90 for a 65-year-old). At a modestly positive real return of 2% per year, the pot lasts longer, but the probability of outliving it by a significant margin remains uncomfortably high for a well-off individual in good health.

The Standard Retirement Income Calculation Is Often Wrong

The financial planning industry has largely adopted the "4% rule" as a shorthand for sustainable retirement withdrawals — withdraw no more than 4% of your initial pot per year and you should not run out of money over a 30-year period.

There are several problems with applying this rule uncritically:

It is based on US market data. The original research (Bengen, 1994; the Trinity Study) used US equity and bond return data. UK and international investors have different return histories and different inflation dynamics.

It assumes a static withdrawal rate. Real retirement spending is not static. Many retirees spend more in their sixties and early seventies (the "active" retirement phase) and significantly less in their late seventies and beyond (lower travel and leisure spending, though potentially higher care costs).

It does not address the fat tail. The 4% rule "works" in the sense of not depleting the portfolio in most historical scenarios over 30 years. But for a 65-year-old with a 25% chance of reaching 91, a 30-year planning horizon is barely adequate — let alone for someone who lives to 95 or 100.

Tools for Managing Longevity Risk

Several financial tools exist specifically to address longevity risk. Understanding each one — and its appropriate role — is important.

Annuities: The Only True Longevity Hedge

An annuity is the only financial product that unconditionally guarantees income for life, regardless of how long you live. It is the financial equivalent of longevity insurance.

The perception of annuities has been significantly damaged by decades of poor-value annuity products, the Pension Freedoms reforms of 2015 (which made drawdown the default choice for most DC pension holders), and low annuity rates during the zero-interest-rate era.

By 2026, with interest rates having risen substantially from their 2020-2021 lows, annuity rates have improved significantly. A 70-year-old purchasing a level annuity can now obtain rates that may make an annuity the rational choice for part of their income requirement.

The key insight is that annuities are more cost-effective the older you are when you buy them, because the insurance company's liability is smaller. A 55-year-old buying an annuity is paying for potentially 40 years of income; a 75-year-old is paying for perhaps 15 years on average. The rate reflects this.

A practical approach — sometimes called the "third age/fourth age" model — uses drawdown from retirement (say, age 65) to 78-80 (the "active" retirement), and then purchases a guaranteed lifetime income annuity at the later age to provide a secure income floor for the rest of life.

Escalating Annuities

A level annuity pays the same nominal amount for life, meaning its purchasing power declines with inflation. An escalating annuity (typically increasing at a fixed rate of 3-5% per year, or linked to RPI/CPI) provides inflation protection but starts at a lower income level. For long-lived retirees, the escalating annuity becomes more valuable over time.

In high-inflation environments, escalation-linked annuities are significantly more valuable than the initial income comparison suggests.

The UK State Pension as the Base

The UK State Pension is a genuine lifetime income, paid for life, uprated annually by the triple lock (highest of earnings growth, CPI inflation, or 2.5%). For UK nationals who have accumulated a full or near-full State Pension entitlement, this represents an invaluable floor.

The full new State Pension from April 2026 is £241.30 per week — approximately £12,548 per year (rising each April under the triple lock). For an individual, it covers a significant portion of basic living costs. For a couple where both have full entitlements, it provides approximately £25,100 per year — well above the "minimum" retirement income identified by the PLSA Retirement Living Standards.

As we have discussed elsewhere, maximising State Pension entitlement through voluntary NI contributions is one of the most cost-effective financial planning actions available. In 2026/27, a Class 3 voluntary NI contribution costs approximately £957 to purchase one additional qualifying year — which adds around £6.89/week (approximately £358/year) to the State Pension for life. At that rate, the contribution breaks even within roughly three years of payment. For any retiree expecting a long life, this is exceptional value.

Drawdown with a Longevity Reserve

For those who prefer to remain in drawdown rather than annuitise, building an explicit "longevity reserve" within the portfolio is a practical approach. This is a proportion of the portfolio — perhaps 15-20% — held in low-risk, inflation-linked assets specifically designated to fund the later years of retirement if they extend beyond the base plan.

The longevity reserve should not be drawn upon unless and until the base plan is approaching exhaustion. This psychological designation helps prevent the natural tendency to draw down too aggressively in the early, more active, retirement years.

The International Dimension

For internationally mobile individuals, longevity planning has several additional complications.

Healthcare costs vary by country. In the UK, most healthcare costs are covered by the NHS (including for UK nationals living abroad who return for treatment in some cases). In the UAE, private health insurance is mandatory. In Spain, the state health system is accessible to residents. In Thailand, private care is affordable but the standard of complex care is variable outside major cities. The healthcare cost assumption in your long-term financial plan needs to reflect where you actually intend to spend your later years.

Currency risk over a 30-year horizon is significant. If you plan to retire in one currency but your pension is in another, a 30% exchange rate shift — not unusual over a decade, let alone three decades — changes the real value of your income materially. Building currency diversification into the retirement income plan is important.

State pensions for the UK nationals abroad may be "frozen." As discussed elsewhere, UK nationals living in certain countries receive no uprating of their State Pension. This significantly erodes the real value over a long retirement. The list of frozen countries includes large parts of Asia, Africa, and some Commonwealth countries; it does not include EEA countries or the UAE.

How Global Investments Can Help

Longevity risk planning requires a retirement income strategy that has been stress-tested against a range of life expectancy assumptions, not just the median. Global Investments works with clients to model retirement income scenarios across multiple time horizons, identify the role of guaranteed income products at different life stages, and ensure that the investment strategy is appropriately positioned to sustain a potentially long retirement.

We also help internationally mobile clients coordinate the currency, healthcare, and estate planning dimensions that make longevity planning more complex for those with a life spanning multiple countries.

This article is for general information purposes only and does not constitute personal financial advice. Retirement planning involves making assumptions about an uncertain future, including life expectancy. The value of investments can fall as well as rise. Please seek professional advice tailored to your individual circumstances.