Robert Powell, Special for USA TODAY 12:46 p.m. EDT October 5, 2016
If you knew your date of death, retirement planning would be a breeze.
Unfortunately — or maybe fortunately? — you don’t. And that can make planning for retirement extremely difficult. Does your nest egg need to last 20 years? 30 years? 40 years? And what about couples? How should couples go about planning for the likelihood that one spouse — usually the husband — predeceases the other?
Well, if you’re like most people, you’re guessing at this, and guessing quite wrong.
“Many people do not understand longevity well, and those people who plan often do not plan for long enough,” says Anna Rappaport, president of a retirement consulting firm bearing her name and chair of the Society of Actuaries (SOA) Committee on Post-Retirement Needs and Risks.
Noel Abkemeier is the founder of Abkemeier Actuarial and chair of the American Academy of Actuaries Lifetime Income Task Force. (Photo: Handout)
Becoming familiar with current life-expectancy statistics is the first order of business. “There are two aspects to addressing longevity,” says Noel Abkemeier, the founder of Abkemeier Actuarial and chair of the American Academy of Actuaries Lifetime Income Task Force. “First, understanding it, and then planning an income that will last throughout life.”
You may live much longer than you think. “There have been significant improvements in how long people survive in retirement, especially for wealthier Americans,” says David Blanchett, head of retirement research at Morningstar Investment Management.
Consider: Someone born in 1950 was expected to live to age 68.2. By contrast, someone born in 2014 was expected to live to age 78.8, according to the Centers for Disease Control and Prevention. In other words, someone born today will need to fund an extra 10 years of retirement vs. someone born 66 years ago.
What’s more, life expectancy for those alive at age 65 has also increased dramatically. In 1950, a 65-year-old male could expect to live another 12.8 years. In 2014, a 65-year-old male could expect to live on average of 18 more years. The same is true for women. In 1950, a 65-year-o woman could expect to live another 15 years. By 2014, a 65-year-old woman could expect to live another 20.5 years.
Another resource is the Living to 100 life expectancy calculator.
Financial advisers are starting to change assumptions about how long clients will live to make sure they don’t outlive savings, according to a survey by InvestmentNews. Advisers are basing retirement-income plans on an average life span of 91 for men and 94 for women, according to the survey.
“Many people do not understand longevity well,” says Anna Rappaport, chair of the Society of Actuaries (SOA) Committee on Post-Retirement Needs and Risks. (Photo: Anna Rappaport Consulting)
Consider the probabilities. One drawback with using life expectancy to plan for retirement is that it’s just an average. One-half will die before life expectancy, and the other half after. So, the better way to approach the problem is to consider the probability of living to certain ages.
Consider: There’s a 25% chance that a 65-year-old man will live to 93; a 25% chance that a 65-year-old woman will live to 96; and for a couple 65 years old, there’s a 25% chance that the surviving spouse lives to 98, according to SOA projections.
All that said, Blanchett still thinks it makes more sense for people (and planners) to use a fixed time horizon, such as planning to age 95.
Couples should consider their combined planning timeline. For couples who are 65 today, there’s a 45% chance that a wife outlives her husband by five years and a 20% chance by 15 years, according to the SOA. “Don’t forget that assets need to last until the second to die for couples,” says Rappaport.
Consider your genes and behavior. “Some factors that influence how long you live may be beyond your control,” according to the SOA. “Others depend upon the choices you make every day. A successful retirement plan will address both.”
How will you manage longevity risk? There are some time-honored ways to deal with the risk of outliving your assets. Those include the use of annuities, a sound asset-drawdown plan, delaying Social Security to age 70 for the higher wage earner, and a reverse mortgage. Read Managing Post-Retirement Risks – A Guide to Retirement Planning.
Remember, says Abkemeier, half of retirees will live longer (than life expectancy) and, to build in a cushion, individuals should plan for an additional five or more years when considering lifetime income.
Robert Powell is editor of Retirement Weekly, contributes regularly to USA TODAY, The Wall Street Journal and MarketWatch. Got questions about money? Email Bob at firstname.lastname@example.org.