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Annuities & Retirement Risk Management, Part 1: Longevity & Cognitive Decline

DPL Financial Partners
May 10. 2024

Annuities can help reduce risks associated with longevity and cognitive decline.

Note: This is the first article in a two-part series that discusses strategies for managing key retirement risks, including longevity, cognitive decline, and market downturns. 

In some ways, retirement planning is like vacation planning. It’s wise to consider and manage risks that could derail your trip. For example, many people will alert their credit card companies (so their cards aren’t declined), adopt international calling plans (to make sure they have cell phone service in other countries), and leave itineraries with loved ones. Similarly, when planning for retirement, it’s important to consider and manage the risks you may encounter. These include: 

Longevity risk. Longevity risk is the chance that you’ll live longer than expected. People often underestimate how long they will live in retirement. The average life expectancy at birth in the United States is about 76 years, so some assume that is an appropriate planning horizon. However, the longer you live, the longer you’re likely to live. The table shows how long a 65-year-old couple in average health can expect to live.

bar graph showing longevity risk

Source: Society of Actuaries Longevity Illustrator

When people live longer than expected, they run the risk of exhausting their savings. Annuity strategies can help minimize longevity risk. These include:

  • Generating guaranteed income to pay everyday expenses. When building a retirement income plan, it can be a smart strategy to cover essential, day-to-day expenses with guaranteed income from secure sources like Social Security benefits, a pension, and/or an annuity. In 2034, Social Security benefits may be reduced by about 20% for all recipients or 25% for new recipients, unless the government acts.1  Consequently, annuities are likely to play a more significant role in retirement plans going forward. 
  • Purchasing longevity insurance. People who want to increase the likelihood that the money they have carefully saved will last as long as they need it to can purchase annuities and elect to begin receiving income at a later age, up to age 85. One option is to fund a qualified longevity annuity contract (QLAC) with a portion of the assets in a rollover IRA. QLACs have additional benefits that include tax-deferred growth and exemption from required minimum distributions.
  • Maximizing Social Security benefits. Currently, if individuals delay taking Social Security benefits until age 70, they receive 124% of the normal benefit.2  However, if you retire in your 60s, it can be challenging to wait that long. Annuities can help solve the problem by providing income for retirement until individuals are ready to apply for Social Security benefits.

Cognitive decline risk. This is the chance that your brain will function less well as you age. Cognitive decline poses a significant threat to financial well-being in retirement because, as we age, our ability to do math and make decisions about money can be negatively impacted. As a result, older adults may begin making poor financial decisions and/or become more vulnerable to fraud.

Surprisingly, annuities can help mitigate risks associated with cognitive decline. For example, annuities help:

  • Minimize loss of wealth. Cognitive decline usually has a negative effect on financial well-being and can significantly reduce household wealth. However, when older adults have income from pensions or annuities, and when they receive assistance from their children, the effect of cognitive decline on wealth is reduced.3
  • Protect against fraud. We all have heard stories about unscrupulous operators preying on older adults—some of them suffering from cognitive decline—and persuading them to move money from traditional stock and bond portfolios to inappropriately risky investments, such as private securities with fat sales commissions or, worse, direct investments that fund a business scheme.  Annuities purchased early in retirement may offer some de facto protection against fraud. The set-it-and-forget-it nature of an annuity may discourage an aging adult from even being tempted to tap into them. And if that doesn’t work, the administrative steps and checks involved when cashing out early may create opportunities for fraud detection or simply persuade scammers seeking fast money to move on to the next victim.
  • Offset long-term care costs. For families that have a history of dementia or Alzheimer’s, annuities offer an additional advantage. Some can be customized to offset the cost of long-term care.

Annuities can be valuable retirement planning tools — even more so now that they are available commission-free — without some of the steep embedded sales fees that have historically contributed to the high cost and complexity of conventional annuities.

If you have questions about how an annuity can help manage risks associated with longevity and cognitive decline in retirement, contact your financial advisor or reach out to a DPL Consultant at 1-877-625-5544.  We can help.




1“The 2023 Annual Report Of The Board Of Trustees Of The Federal Old-Age And Survivors Insurance And Federal Disability Insurance Trust Funds.” March 31, 2023. Pp. 5-6. Cited April 29, 2024.
2“When to Start Receiving Retirement Benefits.” Social Security Administration. January 2023. Cited April 29, 2024. 
3Marco Angrisani. Jinkook Lee. “Cognitive Decline and Household Financial Decisions at Older Ages.” The Journal of the Economics of Ageing. May 2019. Cited April 30, 2024.