Staying Alive to 95?
By Russell W. Hall, CFP®, CPWA®
“Will I run out of money in retirement?” It’s a question that’s at the heart of the financial planning process. To answer it, we run income projections using reasonable but conservative assumptions about what the future might hold. Our goal is to establish the direction that clients are headed, while avoiding giving a false sense of security.
What’s Expected
Among the various assumptions built into retirement projections - like investment return, inflation, and cost-of-living adjustments - life expectancy stands out as perhaps the biggest unknown. Insurance actuaries have long compiled data on this, and the entire IRA required minimum distribution process is built around life expectancy factor tables provided by the IRS. Still, none of us knows exactly how long we will live.
Social Security provides an actuarial life table that can be interesting (or depressing, depending on how you interpret the data!). According to that chart, a 75-year-old male has an average life expectancy of about 10.9 years, while a female’s expectancy is about 12.7 years. An average of 5% of males and 11% of females will live to age 95. Other sources show roughly similar statistics.
The Default
If that’s the case, why do we at Eclectic and many other financial advisors use age 95 as our default life expectancy when we are running projections? Is it a case of blind optimism, or perhaps being overly cautious?
Running a projection to age 95 is definitely the more careful approach. As you can imagine, one of our main jobs as financial advisors is making sure our clients don’t outlive their money. We are more concerned with longevity risk than underspending. In other words, we would rather manage investments so that clients live below their means and leave an inheritance, instead of depleting their assets too early.
Above Average
That said, there are other reasons why we are comfortable using a higher number. The main one is that our clients generally have higher-than-median income and/or assets. That often results in access to better healthcare than average, which leads us to conclude that they likely will have above-average lifespans. That’s not true for everyone, of course, but enough that it supports defaulting to a higher life expectancy.
In a similar way, most of our clients have enough (or will have enough) for retirement through diligent savings and careful spending. They have generally made wise decisions in their life which leads to a good outcome. The same is usually true with their healthcare choices, which in turn can affect life expectancy in a positive way.
As For You…
As you think about retirement, you actually have the most insight into your own life expectancy. You may know how long your parents and grandparents lived, and certainly you know your own health and medical history. Although none of us know for sure, you would have the best idea of whether 95 is reasonable or outside the realm of possibility. If you’re a client of Eclectic, you can have a conversation with your advisor about retirement planning and life expectancy since we are happy to make adjustments on projections.
If you’re not a client or if you know someone who should consider using our services, please contact us. We are happy to meet with anyone for a free, no-obligation meeting. Call us at 714-738-0220 to schedule a meeting, or click here to schedule an introductory call with one of our advisors.