Retirement funding depends on a number nobody knows in advance. Planning to an average lifespan means planning to a figure that half of people will exceed.
An average is not a plan
Life expectancy is a central estimate for a population. Individual outcomes are distributed widely around it, and the spread at retirement age is considerable.
A portfolio sized for the average runs out for anyone who lives longer, which is a large group by construction rather than by misfortune.
Planning horizons are therefore usually set well beyond the average, accepting that the money will probably not all be needed. The surplus is the price of not running out, and it is a deliberate cost rather than an oversight.
How far beyond the average to plan is a judgement about tolerance rather than a calculation. Extending the horizon raises the required capital steadily, so the choice trades present spending against future security.
Conditional life expectancy rises with age
Life expectancy figures quoted at birth understate the remaining years of someone already retired, because they include mortality at younger ages that the person has already survived.
Remaining life expectancy at sixty-five is the relevant figure, and it is higher than a headline number based on the whole population suggests.
This distinction alone causes a meaningful underestimate of the planning horizon in informal calculations. Someone reaching retirement has already passed the ages that pull the population figure downward.
The risk is asymmetric
Over-saving results in leaving assets unspent, which is an inefficiency. Under-saving results in running short at an age when returning to work is not realistic.
The two errors are not equivalent in consequence, which is why planning conventions are deliberately conservative on the horizon.
Capacity to correct declines with age, so the cost of the error grows exactly as the ability to respond falls. Reducing spending in the final years of a long retirement is the only lever remaining, and it is a poor one.
Pooling is what an annuity provides
An annuity converts capital into an income for life, transferring the longevity question to an insurer that pools it across many people.
The insurer can price the average because it holds many lives, while an individual cannot. That pooling is the product being purchased.
The cost is flexibility and, in most forms, the capital itself, which is why the decision is structural and generally irreversible.
Partial approaches sit between the extremes
Covering essential spending with guaranteed lifetime income while leaving discretionary spending funded from invested assets addresses the asymmetry without committing everything.
Deferring the purchase of guaranteed income to later in retirement is another approach, since rates offered generally improve with age.
Availability, tax treatment and product structure differ substantially between jurisdictions, and the decision is one where individual professional advice is appropriate.