My post today was inspired by some recent conversations with clients about using an appropriate time horizon for their retirement plan. With financial planning, we often have to input certain data assumptions into a software program. Amongst the assumptions are the expected age my clients will live.
This not an easy discussion to have, and as you can imagine, it’s impossible to predict. I suppose if people knew how long they’d live, it would make planning much easier! If we knew the exact day someone will perish from the earth, we could customize a plan in which they spent every last penny they had up until that last day!
When I ask clients this question about longevity, the responses are all over the place. Most of them have not thought about it much.
As a baseline, one can consider their family history to get an idea. I often will get something like “well my dad lived until 82, and my mom until 85. So put me down for 85.” I’ve yet to meet anyone who thinks they will live LESS years than their parents did.
Rather than thinking they will live into their 90s and 100s, many expect to die much sooner. They just cannot see it happening. Sometimes I pull out this chart, listing the probabilities of a 65-year-old retired couple and their survival probabilities:
Taking it a step further, would it shock you if I told you that a baby born today has a 1-in-3 chance of living to be 100 years old (for a female baby it’s 1-in-2)?
How about you 40-year old couples reading this- it’s literally a coin toss if you make it to age 95. Yes, 50-50% chance.
Statistics are statistics. But changes in medicine and technology over the next 25 years are going to result in people living longer. If you aren’t planning for longevity, you run the risk of outliving your money. This is one of THE MOST COMMON concerns of people setting up retirement plans. And it should be for you too.
Planners like myself turn to various life expectancy calculators available on the web. I would encourage you to do the same! Here’s one for example, it’s simple and straightforward from the Social Security Administration. Or here’s a more extensive one that asks more about your lifestyle.
Look up your actuarial expected age – it’s somewhat scary and somewhat depressing. My birthday is this month, so I’ve been thinking about it myself. Granted it’s strange to see that I only have 18,000 days left to live (sigh).
While life expectancy is important, it’s just one component of longevity. Health span – how many years you have left in relatively good health (mental and physical) – should be part of the equation.
So if you think about an average American worker, he/she works from age 25 to age 65 (40 years). Along the way they save money and hope that money (along with social security and maybe a pension) carries them another 20-30 years until death. Well I am telling you now, you’d better be prepared for that money to last for 40 plus years. Living to age 100 is definitely possible, and getting more likely by the minute.
The odds of living a long time introduce the issue of “longevity risk”, the danger of exhausting resources before the end of life. And the risk exists even for those of affluent households, no one is exempt.
Women typically live longer than men, and statistically have more money problems because of that. It’s striking to see the percentage of women over age 65 who live in poverty, whether it’s from being a widow, divorced, or never married.
Implications of living longer
What do some people do to combat potentially living longer? One way is to work longer. Even if it’s not the full-time 40-hours-a-week grind, it might be a part-time job or side hustle that brings in some cash flow. Not only can this help you postpone taking social security, but it reduces the number of years you’ll need to tap into your nest egg. Working into your 70s also helps you contribute to society and feel connected with people and the world.
As far as investments go, investing in longer-term bonds or annuities can help. Annuities specifically remain a small part of the overall financial market, despite the benefits. Studies show that people who own annuities live longer (they are happier, want to remain healthy, and want to keep collecting those checks as long as possible!).
It might go without saying but spending less in retirement is a desired goal. Or shall I say, keep spending in check. Whether it’s eliminating debt or sticking with a strict budget each month, controlling the outflow will help your money last longer.
The Flip Side
The counterpoint to all this is the fact that planning too conservatively has impacts as well. And planning in this conservative fashion does have a cost.
Consider a case where we assume a very long time frame to live (age 105 versus 85), and use conservative rates of return assumptions for the investments. A client with these circumstances might save more, work longer in life, and not get to enjoy his younger lifestyle as much as he otherwise would have.
If a person does a great job saving and working, expecting to live a long life but unexpectedly dies early…they could leave a giant/unspent financial legacy behind! They possibly missed out on opportunities to live a fuller life while health was good in the earlier years.
Think about a parent or grandparent – wouldn’t you want them to live their life to the fullest and use the money they worked so hard for? My guess would be YES. If you earned it, you should spend it as you please!
My final takeaway is that it appears that either being too conservative or too aggressive does have consequences and drawbacks. Part of my job is more to set reasonable expectations based on many factors and give clients a sufficient starting point for making decisions.
But in general, I’d err on the side of caution and be more conservative. Maybe not plan until your MAXIMUM possible age range (like age 120), but something like 5-10 years over what you can reasonably expect. So if your parents and grandparents lived to be 80 and 90, I’d say plan on living to at least 95-100. If not longer.
Go back and re-visit your retirement plan. If the (very possible) assumptions of you living to 100+ are not being used, you should re-think things. At least be aware of the statistics and how you can potentially prepare for this longevity risk.