Longevity risk: How lifespans affect retirement planning

In retirement planning, longevity risk is an often underestimated and crucial factor. What is longevity risk? It is the risk of outliving your savings, a concern that has become more relevant as the average American lifespan increases, especially for women.

Defined contribution/401(k) retirement plans often fail to address the complexities of longevity risk, which can have a disproportionate impact on women and potentially leave them financially vulnerable in their later years. It is crucial to acknowledge these limitations and seek solutions that cater to the unique needs of women in retirement planning.

Thankfully, there is an alternative. Cash balance plans can be a valuable tool for women seeking to mitigate longevity risks in retirement. These plans offer several features that can help provide financial security, including:

  1. Guaranteed contributions: Cash balance plans ensure annual contributions to the plan participant's account do not depend on matching employee contributions as is common in 401(k) plans. These contributions typically consist of employer contributions and employee contributions, if applicable. By receiving a consistent stream of contributions over their working years, women can accumulate substantial retirement savings, which can help offset the financial challenges of a longer retirement.

  2. Guaranteed retirement income: Cash balance plans offer participants a significant advantage: a guaranteed retirement income stream. At retirement, participants can be encouraged to receive their accrued benefits as a series of guaranteed monthly payments rather than as a lump sum— ensuring women have a reliable source of income throughout their retirement, mitigating the risk of outliving their savings.

  3. Equal treatment: Cash balance plans provide the same retirement benefits for men and women based on their accrued benefit, including conversions to lifetime income that do not disadvantage women versus men (which doesn’t occur in DC plans purchased on the retail market). This design helps address gender-based income disparities and ensures that women receive fair and equitable retirement benefits.

Tailored plan design: Employers can customize cash balance plans to suit the needs of their workforce, including addressing the unique retirement planning challenges women face.

Cash balance plans offer a structured and reliable approach to retirement savings that can help mitigate longevity risks for women. These plans provide consistent contributions, a predictable retirement income stream and protection against market volatility and inflation. Additionally, their portability and customization options make them a valuable tool for addressing the specific financial challenges that women may encounter during their longer retirement years.

At October Three, we are committed to helping plan sponsors, retirement investment advisors and individuals navigate the complexities of retirement planning. We believe that all individuals, regardless of gender, deserve a secure and prosperous retirement.

Revamp your approach and provide your workforce with a cutting-edge DB plan design. With increasing competition to attract top talent in today's job market, proactively stay ahead and reach out to us for insights into our innovative retirement programs. Our expert professionals will guide you through the intricacies and tailor a plan to suit your organization's unique needs.