Many of my ancestors have lived long, active lives. My paternal grandmother lived into her nineties in a small town in southern Arizona. Even during the later years of her life, she would stubbornly climb a ladder with a big stick to knock down the nuts from her pecan tree. Her husband, my grandfather, died before her, but still lived to 83.
I’d like to think I will live as long as they did, but I also have family members who died at a younger age. What will be my lifespan?
A vital part of financial planning is making sure that you have sufficient funds for every year of life—no matter how many birthdays that may be. A recent poll of Americans who had a least a quarter-million dollar nest-egg revealed that they would approach their money management differently if they knew today that they were going to live to be 100.
Life expectancy has been steadily increasing. During the past 100 years, the average life expectancy has increased by 30 years. When Social Security was first created in 1935, most people lived just a few years in retirement. Now they can expect to live for decades after retiring!
This opens up all sorts of possibilities for quality of life during retirement. But few people realize the dramatic impact it has on financial planning. Having enough money to support 15 years of retirement is completely different from financing 30 years or more of retirement! In the first case, you can spend investment principal. But in the second case, spending principal is tantamount to financial suicide. The two situations are as different as night and day.
The “Catch 22” problem
Let’s assume that you are a 65-year-old female who is retiring. The Social Security actuarial life table projects that you will live to be 85. Based on that information, you develop a plan that will allow you to make your money last for 20 years. But let’s assume that because of good genes and healthy living, you reach 85 and are still in excellent health. Now what?
This illustrates why “average life expectancy” may not be as important in financial planning as looking to the highest possible life expectancy.
Planning for a Longer Life
Since you don’t have a crystal ball, you must determine how much money you need to fund an increasing but unknown length of retirement. A client recently summed up his dilemma in this way: “I don’t want to leave a fortune to my kids,” he said. “So it is not my goal to scrimp and save just to leave them an inheritance. But at the same time, I don’t want to run out of money either! I don’t want my kids to have to pay my expenses.”
This client is not alone. It is a delicate balance to collect the “eggs” (retirement income) without killing the golden goose (the investment principal nest-egg). To financially accommodate a longer life, there are several things that can be done:
• The most important is to reduce expenses and increase savings
• Contribute to a 401(k), IRA or other retirement account.
• Get all consumer debt paid off• Retire later than 65
• Consider at least part-time work during retirement
• Work with a financial advisor to re-evaluateInsights for Financial PlanningMay & June 2012 savings and investment strategies on an ongoing basis.
• Make adjustments to your annual budget as needed.
• Consider investing a portion of your funds in a lifetime income product such as an annuity
• Maintain a healthy lifestyle. This not only reduces medical costs, but will greatly improve quality of life as well.
Longevity Can Overwhelm Society
Living longer is a sensitive topic when it comes to government entitlement programs. These programs were introduced at a time when “retirement” was a relatively new concept, because life expectancies were so much shorter. In fact, at the time Social Security was introduced, payouts could begin at age 65, but the average life expectancy for men was 60.3 Bottom line is that Uncle Sam really didn’t think that the majority of Americans would collect!
Another dilemma is medical care. Over half of all U.S. spending for medical expenses goes for the last month of life.4 And even for those who are insured, unreimbursed medical expenses (such as home care) can often eat away at retirement savings.
Today we face a new set of retirement challenges not encountered by previous generations. Living longer is one of the benefits of advances in healthcare and the standard of living. But longer life-spans come with added responsibility. Longevity is something to be celebrated. As a financial planner, I would hope proper planning would help you achieve that goal.
1,2) Phoenix Business Journal, February 27, 2012