Thinking about retirement can bring up two sensitive subjects: money and death. After all, there are two main questions you should be asking yourself when it comes to retirement planning:
- How much money will I need each year in retirement?
- How many years will I spend in retirement?
It can be a bit simpler to answer the first question. A general rule of thumb for retirement expenses is 70-80% of current expenses. For the second question, it’s important to think about in the context of how many years of retirement you should be preparing for. And it can be quite a bit trickier, because it involves a number of complex factors.
According to the Centers for Disease Control, the average life expectancy in the United States is about 79 years. So someone might think that if they retire at age 65, they should plan for 14 years of retirement. However, this number may be a severe underestimate, and in reality their money might need to last twice as long. At Personal Capital, we help you think about retirement by factoring in what age you want to retire based on a life expectancy that exceeds the CDC’s estimation.
There are four main factors that can lead people to underestimate the life expectancy they should be planning for.
1. Life expectancy increases with age
Suppose you’re 90 years old – what is your life expectancy at this age? It clearly can’t be the national average of 79. Based on mortality tables, the Social Security Administration (SSA) calculates that an American who is 90 will live another four years on average. So if you’re 90, then your life expectancy is 94. Similarly, an American who is 65 will live another 18 years on average, so their life expectancy is 83.
This factor by itself, then, could add about four years (83 vs. 79) to the life expectancy someone should plan for based on a retirement starting at age 65.
2. Wealth influences life expectancy
Many studies show that the greater someone’s wealth and income, the greater their life expectancy. This can be due to a combination of factors, like less physically-demanding jobs and access to better to healthcare. In the extreme case, a Harvard study compared the life expectancy of top-1% earners in the United States to bottom-1% earners. For men, the top 1% had a life expectancy nearly 15 years higher than the bottom 1%.
But it’s not just how much you earn as an individual; the analysis also found that there is a staggering difference in life expectancy within low-income residents in wealthy areas – such as New York City and San Francisco – compared to poorer areas. While certain behavioral attributes contribute to this (low-income residents in NYC were found to drink and smoke less and exercise more compared to their counterparts in other cities), the findings were still unclear about the reason why this occurs. The only correlation, the study says, seems to be how educated and affluent the area is.
Bottom line is that if you have above-average wealth and income – or even live in an area that does – you likely have an above-average life expectancy.
3. Last survivor life expectancy is greater than single life expectancy
While one may be the loneliest number, and two can be as bad as one, these can influence your life expectancy.
Imagine you are flipping a coin. As long as a coin lands tails, you can continue flipping it, but one you flip heads it is “dead.” What is the chance the coin is dead after one flip? One in two. Now suppose you are flipping two coins. What is the chance both coins are dead after one flip? One in four (both have to land heads). Adding another coin increased how long we can expect at least one coin to be alive.
Similarly, if you are married or share finances with someone, your last survivor life expectancy is greater than each of your individual life expectancies. When planning for retirement, you should generally plan through the second death, since the goal is to be able to pay for living expenses during both people’s full lives. As with the first two factors, using second survivor life expectancy can add another three-plus years to your life expectancy for planning purposes.
4. Life expectancy has generally been increasing over time
It’s no surprise things were different in 1960. The average cost of a new house was $12,700. A movie ticket was $1. And life expectancy was lower significantly lower.
Below is a graph that is depicting how life expectancy has changed over the past 50-plus years:
As you can see, life expectancy has increased by nearly 10 years over that timeframe. While it seems unlikely for life expectancy to increase that quickly over the next 50 years, you can still expect modest increases over time. If you are still decades away from age 65, you again might want to add a few years to your life expectancy when planning for retirement.
Overall, these four factors can easily add a decade or more to a person’s life expectancy in the United States. It is why planners typically model a life expectancy of 90-100. Of course, your individual life expectancy will be modified by many factors, such as your own lifestyle, health and your family’s health history. That’s why it’s important to think about your retirement in a comprehensive way. Our free Retirement Planner helps you build, manage and forecast your retirement plan, and our advisors can discuss your retirement goals with you while factoring in all the of the moving parts, such as life expectancy.
Want to learn more? Schedule a free consultation with one of our advisors today.
Zach Lott, CFP®
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