“The oldest old—people age 85 or older—constitute the fastest growing segment of the U.S. population… And living to 100 is becoming increasingly commonplace.”
– National Institute of Aging, U.S. Department of Health & Human Services
A large majority of you, our clients, are retired or within a few years of retirement. Further, those who are nearing retirement are looking forward to 30+ years of retirement. In other words, we must plan for ever-increasing costs of essentials, travel, and healthcare over a 30-year period.
One of our main long-term goals is to partner with you, as you enter and pass through retirement with dignity and independence. Our clients possess qualities of personal initiative, hard work, education, and thrift. Yet, as we work with you to develop your long-term financial plan, the one question that is the hardest to answer for both of us is, “When are you going to die?” Of course, if we just knew that, we could develop the perfect financial plan that would perfectly match up resources, distributions, and your life on earth. Unfortunately, defining one’s life expectancy with any confidence is impossible. Thus, we at The Nalls Sherbakoff Group, plan for above-average longevity.
Although the law of large numbers and the law of averages gives us some values to work with, they are just that, average. Today, the average 65-year-old male has a life expectancy of around 83 years and a 65-year-old female has a life expectancy of around 85 years. What that tells us is that half of all 65-year-old males will pass away before age 83 and half of 65-year-old females will pass away before age 85. Now, if we only knew which person would die before reaching the average life expectancy, we could proceed with total confidence in our financial plan. However, once again, that’s not possible.
If we look at a married couple, both age 65, then there is greater than 50% chance that one member of the married couple will live to at least 90.
With apologies and respect to Clint Eastwood, let me paraphrase Dirty Harry, “Well, to tell you the truth, in all this excitement of your retiring, I’ve kinda lost track myself. But being this is your retirement income plan and you could run out of money, you’ve got to ask yourself one question: ‘Do I feel lucky?’ Well, do ya, retiree?” The possibility of running out of money before you pass away is longevity risk.
Social Security, which provides an inflation-adjusted, lifetime income to retirees, is one tool that nearly everyone can use to mitigate longevity risk, especially if you defer benefits to age 70 to maximize your social security retirement benefit. Pensions, although we are seeing fewer of these, usually provide lifetime income, but do not offer cost-of-living adjustments and, if there is a survivor benefit, the pension amount is usually reduced from the start and still doesn’t offer cost-of-living adjustments.
When developing financial plans and retirement income strategies for you, we plan for long life expectancies beyond age 90. A good target is to plan for an age of death at which the survival rate is below 10%. This is an age approaching 95.
Although education, diet, and exercise correlate with above-average life expectancy, your family history and other demographic elements can help predict your personal life expectancy. Over the last several years we have been suggesting that our planning clients use the free “Living to 100 Life Expectancy Calculator” located at https://www.livingto100.com/.
If you wish to explore more about life expectancy, check out these free calculators:
- Healthy Life Expectancy Calculator: https://apps.goldensoncenter.uconn.edu/HLEC/
- How Will You Die: https://flowingdata.com/2016/01/16/how-you-will-die
- Years You Have Left to Live, Probably: https://flowingdata.com/2015/09/23/years-you-have-left-to-live-probably
- Actuaries Longevity Illustrator: http://www.longevityillustrator.org/
As always, we are honored and humbled you have given us the opportunity to serve as your financial advisor. Please let us know if you have any questions, concerns, or comments.