- Effective retirement planning depends largely on answering one question: How long will I live?
- But nobody knows the real answer to this question.
- According to experts, you should consider the following to best evaluate your plans.
To plan your retirement effectively, experts say you need to keep an eye on your savings rate and your overall emergency fund.
However, how much you really need to have saved depends on another number – your life expectancy.
But this number is extremely vague because no one knows how long they will live.
“Nobody really knows, and that uncertainty is uncomfortable,” said Lisa Schilling, director of practice research at the Society of Actuaries Research Institute, the research arm of the Society of Actuaries.
According to a study by HealthView Services, a provider of healthcare cost forecasting software, the financial industry typically uses age 95 as the default assumption.
More from Personal Finance:
Why inflation is still disrupting retirement planning
Older voters want candidates who protect social security
Workers in certain industries tend to have higher 401(k) balances
Instead of planning for a life expectancy, the Society of Actuaries and the American Academy of Actuaries emphasize longevity.
Longevity risk measures the probability that someone will live longer than expected and outlive their savings.
“If you read that life expectancy is 84 and you plan to have your money last until 84, there’s a big surprise waiting for you behind the curtain that you haven’t opened yet,” Schilling said. “There’s a very good chance you’ll need your money longer than that, for many reasons.”
Life expectancy estimates could bring surprises
The Society of Actuaries and the American Academy of Actuaries recently relaunched a free online longevity illustrator.
The tool asks for basic information about an individual or couple: age, gender, retirement age, smoking status and a description of general health – poor, average or excellent.
According to the organizations, the results should provide a “reasonable” estimate of possible life expectancy. The figures show the probability of reaching a certain age and the number of years one can still live in retirement.
Generally speaking, the older you are, the greater your chance of living longer. Life expectancy at birth may be 84 years, but if you’re already 65, it’s even higher, says Schilling.
The findings could help individuals fully understand the range of options when planning how long their money needs to last, she said.
There is another realization for couples that often comes as a surprise. “The chance that at least one of you will live to be 90 is even greater,” says Schilling.
But the life expectancy of 95 years predicted by the financial industry may be too generous, according to a recent study by HealthView Services.
The predicted life expectancy for a 65-year-old person today without chronic diseases is 90 years for women and 88 years for men.
However, research shows that only about 5% of people over 60 do not have chronic complaints.
Health status influences life expectancy forecasts
Chronic diseases such as high blood pressure, cardiovascular disease, cancer, diabetes, high cholesterol, tobacco consumption, obesity or Parkinson’s disease reduce a person’s expected life expectancy.
For example, the probability of a healthy 65-year-old man without chronic diseases reaching the age of 95 or older is 19.3 percent. However, this probability is 17.5 percent for high blood pressure, 15.8 percent for cardiovascular disease, 12.5 percent for high cholesterol, 8.8 percent for obesity and a body mass index between 35 and 39, 7.4 percent for tobacco use, 2 percent for obesity and a body mass index between 40 and 44, and only 0.4 percent for diabetes.
Those probabilities could make a big difference to his retirement savings needs. A healthy 65-year-old man might need about $1.1 million to maintain the required 80% income replacement rate if he were to earn $100,000 in 2023, according to HealthView Services. This assumes he lives to age 95, has a 6% annual portfolio return, receives Social Security benefits, and inflation is 3%.
However, if the 65-year-old man has a chronic illness, his life expectancy is lower. And that could free up a larger portion of retirement money that could be spent elsewhere, according to HealthView Services.
Because of his high blood pressure, his life expectancy could be reduced by nine years, to 86, leaving $447,469 available for long-term care, emergency funds, inheritance money or other purposes, the study found.
Smoking tobacco could shorten his life expectancy by 13 years, to 82, saving him $616,245, the study estimates. Diabetes, on the other hand, could shorten his life expectancy by 16 years, saving him $727,947.
Most experts advise individuals to prepare to outlive their assets by delaying taking Social Security retirement benefits or considering cashing out a pension to increase their monthly income.
How personalized numbers can help
But considering a person’s individual health status and its impact on life expectancy can help create personalized financial plans, according to Ron Mastrogiovanni, CEO of HealthView Services.
“During a planning process, people are more likely to take action when the numbers are personalized,” Mastrogiovanni said.
This does not necessarily require a complete abolition of the 95-year age limit, he said.
However, telling someone their personal life expectancy can help provide a more reasonable idea of the age you can plan for.
“That doesn’t mean you have to choose that number,” Mastrogiovanni said.
“Whatever you want; you want to move out in four or ten years, you can do that,” he said.
“But at least you are working with an actuarial base number.”
