From Retirement Now Newsletter September 30th 2021
With a definite emphasis on “estimate.”
Life expectancy is one of the biggest unknown variables you will have in your retirement plan. That doesn’t mean you can’t take some steps to try and estimate it. Or take steps to try and overcome the fact that it’s always an unknown.
One strategy is by understanding how Social Security works and thinking about delaying benefits.
Afterall, the longer you live the better the decision to delay Social Security turns out to be, all other things being equal.
Which is why last week’s MasterClass Monthly was all about that topic.
But delaying Social Security isn’t the only arrow in your quiver.
A lot of retirees, and really people that are on the verge of retirement are very worried about the financial implications of a long life.
Those implications being that their savings/investments/401k/IRA, etc. have to support them for a long period of time.
It’s where we get the retiree’s great worry, “I hope my money lasts longer than my retirement.”
And it’s a big factor that is in the minds of a lot of people before they finally submit theie great resignation letter.
A good free resource to estimate your life expectancy was put out by the American Academy of Actuaries and the Society of Actuaries.
The calculator uses limited inputs and is based on some subjective answers, like “how do you rate your health?” with the options “excellent” “average” and “poor.” But it’s a good resource, especially since it doesn’t just give a single number, but it also gives probabilities of making it to different ages.
Here are some of my thoughts on a “how long will your retirement last” report.
It’s good to have the information. But it’s even better to apply it to your retirement plan.
So for example, if you have a life expectancy of 85 that means there is a 50% chance you will live beyond that age. If you prepared a retirement plan, or you had a financial advisor prepare one for you, if it was projected in the plan that your savings would only last until age 85 before they are all spent up, then 50% of the time you could be in trouble. It probably makes more sense to build a retirement plan that will sustain you beyond that age.
Some people are more worried about this risk than other people. For someone that is very concerned about living a long life and possibly outliving their assets, they may want to look at the age where they only have say a 10% chance of living to.
This would be a statistically low figure. So if they could prepare a retirement plan where their assets are projected to last them until that age, that would give them a lower likelihood of running out of assets due to long life.
If someone is not as worried about this, they may choose a younger age, say whatever the age is that they’d have a 25% probability of making it too.
This age would be a younger age. So their retirement plan may only show their assets lasting till then.
Where the rubber meets the road is in what type of spending goals can be sustained with these different life expectancy estimates.
The person that wants their portfolio to support them and last them through a very old age will need to spend less than a person who is comfortable assuming they will not live as long.
This is where the trade-offs come when building out your retirement plan.
Are you willing to cut back your portfolio distributions so they will last you over a 40 year period?
Or are you comfortable assuming a 30 year period, which means you can spend more and enjoy a higher standard of living in retirement.
Or do you believe a different time period would be better for you?
Life expectancy is just one variable but it impacts the level of spending your life savings and investments can support.
Or better put… the level of lifestyle you can afford in retirement.
So if you are getting close to making that decision to give your boss your retirement papers, this is huge factor that you need to be looking at and using it to help determine what level of lifestyle you can afford in retirement without running out of money.
Otherwise, if you just wing it the most likely result is to curb back on your spending more than is necessary because you are too afraid of running out…
Or spend too aggressively early on, only to realize years into retirement that your balances are getting lower than you feel comfortable with and then being forced to cut back or else you may completely run out of money before retirement is over.
Well, if you’d rather avoid either of those bad options… having a retirement income replacement plan would help.
It can be difficult to pull all these different factors together when building a plan, factors like not only life expectancy, but when to draw Social Security, how to invest the portfolio to generate income for you, how to reduce taxes owed in retirement, determining how much you can afford to set aside for an inheritance, how much you can spend without putting too much pressure on your portfolio to sustain it, and more.
If you want help with this, so you don’t have to worry or second guess your decisions, wondering if 10 years into retirement you realize you’ve been spending too much (or realize you’ve been too Ebenezer-ish and not fully enjoyed your retired years like you could have) then feel free to click here to set up a 20 minute phone chat with me to discuss your retirement.