I don’t know about you but the list of things I understand and can control seems to be getting shorter and more pronounced. One thing I know, from the details to the nuanced big picture, is financial planning.
Perhaps ironically, financial planning (and investment management) is mostly about controlling what we can control and hedging against the things we can’t. And one of the obvious and important variables we can’t control is our life expectancy. We can eat well, exercise, and generally take good care of ourselves, but that’s about it. Longer is usually better but longer retirement periods are less predictable and more expensive. This raises the bar for retirement readiness.
So, how do we plan when such an important variable as life expectancy is unknown?
Appropriately, “we” (planners and often clients) tend to err on the side of caution by using what we think are conservative estimates for life expectancy, typically somewhere in the early-90’s age-range. Maybe 100 in some cases.
But how realistic is that? You have your family history and gender to consider, plus your health status and maybe some “bad” habits to account for. Then there’s research showing how wealthier people tend to live longer, as do those with more education. Ethnicity also impacts this. Younger people are expected to live longer than their parents and grandparents. Other research shows how we tend to underestimate our life expectancy at younger ages and then shift to overestimating as we age. So, there are lots of variables that could go into such an important planning number.
To deal with this, some researchers advocate using a personalized lifespan estimate. According to work by Jeremy Ko, Ph.D., writing for www.kitces.com, various metrics can be assessed to add or detract life expectancy. One standard metric is how being a smoker could reduce your lifespan by 5-7 years (based on national averages). Being in otherwise poor health currently could take 8-10 years off the average, but having gone to college and being a women could each add back multiple years. Adjusting one’s life expectancy for these and other factors could swing a lifespan estimate by as much as 10-20 years from the average.
There are many planning implications to this, such as…
Is longevity common in your family? Are you higher-income, better-educated, and try to live a healthy lifestyle? The value of fixed income from Social Security and pensions rises the longer you plan to live. The SSA’s website calculator shows life expectancies from early to late-80s for a variety of current ages. Plan to live longer and you’re almost certain to benefit from delaying your Social Security and (if possible) your pension benefit, if you’re lucky enough to have one.
For couples, how are your life expectancies different? One spouse dying too soon can reduce Social Security and pension cashflow to the household, so large gaps in expected lifespan should be planned for, or at least stress tested.
And if you’re assuming a shorter lifespan for a variety of reasons, maybe filing for your Social Security early makes sense. Maybe even cashing in a pension balance and maximizing income with a private annuity (I’m wincing as I write this) can make sense. We might structure your investment portfolio differently as well. That’s the opposite end of the spectrum from the points above and obviously a huge judgement call, but at least these are decisions you can make.
But if longevity is your goal, perhaps thinking harder about when to actually retire and what that means for you could be important. In other words, potentially three or four decades of retirement is a long time, so maybe taking a break from work and then going back and working less or in a different capacity can make better sense than quitting too soon. This can be from a financial or psychological standpoint, or both.
While it may seem counterintuitive, being too conservative is also a risk. People usually want to reduce their longevity risk (the likelihood of running out of money too soon) but this can be taken too far. For example, say you’re worried about living until age 100 and having to deal with expensive health-related issues in your later years. That could mean reducing retirement spending to compensate or even delaying retirement altogether. What if your personalized lifespan estimate suggests that a shorter life expectancy like 80 or 90 is more likely? Maybe you could spend more during retirement, retire a little sooner, or both.
Maybe, maybe, but we also don’t want to go the other direction and use a shorter expected lifespan to smooth out planning deficiencies. Common ones are planning to spend too much on expensive one-offs like big trips during retirement, having too much of the wrong kind of debt, or simply not having saved enough to make realistic scenarios work in any other way than shortening the timeframe.
Okay, so what are some ways to get more detailed numbers? I’m sure there are lots of variations out there, but here are a few sites to check out if you’re interested, in order of simplest to more substantial inputs/outputs.
The American Academy of Actuaries: https://www.longevityillustrator.org/
This site only asks a few questions and shows you the likelihood of living to certain ages. For me, the chart shows a 50% chance of living to age 90 if I retired at 65 (I’m currently 49), and I have an 8% chance of living to 100.
Actuaries at the University of Connecticut have this site: https://apps.goldensoncenter.uconn.edu/HLEC/
Their site asks a few more questions and predicts I’ll live to age 99 with three or four “unhealthy” years (presumably my last years…).
Living to 100: https://livingto100.com/calculator
I’ve written about this site before, but it’s been a while. The two sites above are free with no email/login is required. Living to 100 is free but requires you to log in. The site asks a lot more questions and it takes maybe 5-10mins to complete the login and Q&A process. The output suggests I’ll live to 91 and offers some feedback that could, if taken in total, add about three years to my life expectancy.
If I averaged the varied output from all three sites, I’d have a life expectancy of maybe 93. I could decide to use that number in my planning and that would be reasonable thing to do.
That said, and sort of contradicting what I just wrote, I think it’s prudent to stress test your plan with multiple life expectancies. Go short, go long, and maybe settle on a Goldilocks planning age somewhere in the middle. Doing so should help you understand the range of life expectancies your finances can support. Then periodically retest for confirmation, and test again when (not if) your outlook changes.
Ultimately, the date of our death isn’t something we can necessarily control, but we can still plan for that.
Have questions? Ask us. We can help.
