Living to 100 years old is considered by many to be a record benchmark. But a recent article by Matthew Sparks in the Telegraph, "Pension firms preparing for customers to live to 125," reminded us that, for insurers, the age of 100 is where things start to get interesting. That is because life expectancies have steadily increased over the past few decades and, projecting ahead, people living to over 100 years old will soon be the norm. After all, based on projected mortality table assumptions, the probability of a 65 year old living to at least age 90 is 38% while the probability of a 65 year old living to at least age 100 is 5%. Either of those probabilities coming to fruition could have some nontrivial financial implications for retirement plan sponsors and insurance companies. Insurers taking on the obligations of providing life annuities need to account for the possibility of people living well beyond their average life expectancies. In fact, it's not uncommon for many pension models and retirement savings products to be valued under the assumption that its users could live to be up to 125 years old.

The increased longevity could of course turn out to be both a blessing and a curse for retirees. It's a blessing if one is able to spend more time with one's family while still being able to live comfortably and draw from one's savings. On the other hand, not being able to afford necessary healthcare services or not having adequate retirement income could make longevity a living nightmare.

What has been observed so far is that living beyond one's average life expectancy can be costly and problematic. What is needed is a way to address this longevity risk. One possible solution is the creation and acceptance of a longevity plan. This is a setup where one's personal savings and accumulations from a defined contribution (DC) plan is meant to carry you through the initial retirement years leading up to average life expectancy. Then, a longevity defined benefit (DB) plan would commence at the later stages of retirement and continue for the rest of one's remaining lifetime. The allowance for a later commencement age would help keep the costs of this product down.

The concept of longevity plans is expected to get increased attention as Baby Boomers begin their retirements. Hopefully, legislative action can occur soon to legalize and promote longevity plans so that we can avoid a retirement crisis in the future. To read more about longevity plans, please see the article "Longevity risk and retirement," available here.