During your retirement planning process, a typical concern is whether the funds you are setting aside will be enough to carry you through retirement. Part of the uncertainty comes from not knowing how many years you will have to finance.
Some retirement plans use average life expectancy in their calculations, which can be dangerous. For example, while the average life expectancy for a man aged 65 is 84 years, Social Security says he has a 10% chance of living beyond age 96. A woman's life expectancy is 87 years, with a 10% chance of surpassing age 98.
So what happens if you plan for the average but live another 10-12 years? That's the longevity risk that not enough people address proactively: the risk of running out of money.
Traditional retirement products such as annuities, 401(k) plans and IRAs have a place in retirement planning. Still, none are designed to maintain a retirement lifestyle for as long as you live.
Today, a solution to growing old with confidence lies in a new way of using longevity risk pooling to protect future retirees. It helps them replenish their retirement funding should they reach the age when money often runs out. And they get to choose that age.
The solution is called Savvly.
What is Savvly?
With Savvly, investors can purchase shares in its risk-pooled retirement plan, typically allocating 5-10% of the assets earmarked for retirement to a low-fee, recognized stock market index fund. By employing risk pooling, the common risks are shared among several people.
Each investor selects a payout date beginning in their mid-70s or later to receive their replenishment. And when making the initial purchase, the investor can name an individual, a business or a trust as the beneficiary. Participants agree that if they should die before their payout date, their beneficiaries receive a portion of their investment's value, and the remaining amount stays in the pool.
Participants who reach their payout date will receive their full share of the pool based on the value of their original index fund investment plus their share of the redistributed funds in the risk pool. Married couples may invest in the plan separately – and strategically – to meet their longevity needs under different scenarios.
How do you invest in Savvly?
Other retirement instruments might require tying up a significant portion of your accumulated assets, but Savvly only requires a small percentage if you can invest while you are in your 50s or 60s and are willing to let the investment grow until at least your mid-70s.
To start the process, you would first work with your advisor to determine how much you want to invest and what payout age is optimal for your financial plan. You might even select more than one target date to distribute the release of funds: by releasing only some, the remainder is allowed to continue growing.
Your advisor's role is particularly critical in helping you select the appropriate payout age. The payout decision requires a clear understanding of your values, goals, hopes and dreams, as well as the rest of your financial situation.
That personal guidance could never be provided by a robo-advisor – a digital platform that provides automated, algorithm-driven financial planning services with little-to-no human supervision. Why? Because there's more to it than algorithms.
With the target date decided, your advisor would fill out the pertinent information on Savvly's custom web app, designed for ease of use and with iron-clad security. The system uses what is entered to generate documents automatically for you to sign.
Once documents are signed, funds are transferred according to the clear instructions, and your participation in Savvly's longevity solution is confirmed. Your longevity risk has been addressed.