Life may be short, as the saying goes, but chances are it’s not as short as you’re anticipating.
When the Society of Actuaries (SOA) asked people to identify the age of their longest-living family member in its 2013 Risks and Process of Retirement Survey, nearly 60% of affluent pre-retirees reported having a relative who lived until at least age 90. But when those same individuals were asked to estimate their own life expectancy, less than 30% picked 90 or older.
True, one long-lived relative may not have any bearing on your own lifespan—but it should inform your expectations. Yet, in another SOA survey, about four in 10 respondents underestimated their life expectancy by at least five years.
These results suggest that there can be a serious disconnect between how long people think they’ll live versus how long they are likely to live. And that gap can skew their retirement outlook. “How long you live is one of the most important questions in retirement planning,” says Rob Williams, managing director of income planning at the Schwab Center for Financial Research.
Granted, anyone’s life expectancy is at best an educated guess, but Rob recommends that you err on the side of overestimating. “You don’t want to plan on having just an average life expectancy, when by definition there is a 50% chance you will live longer than the average,” he says.
What life expectancy means
Rob also highlights an important but subtle point: Average life expectancy is not an estimate of when you will pass away, but rather an estimate of when 50% of an age cohort will still be alive.
Thus, according to the number crunchers at the Social Security Administration, a 65-year-old woman today has an average life expectancy of 20 years and a 65-year-old man an average life expectancy of 17.6 years. That means that 50% of today’s 65-year-old women will live past age 85 and 50% of today’s 65-year-old men will live past age 82.
This numerical estimate is an important starting point for grappling with the greater unknown, which is how long you’ll actually live.
And bear in mind that among couples, the odds of an extra-long life increase for at least one spouse. “Typically it’s the woman who is left on her own,” notes Cindy Levering, co-chair of the Society of Actuaries’ pension research team. “The goal should always be to build a plan that focuses on the security of the survivor.”
Life expectancy is a moving target
Knowing your life expectancy isn’t a onetime proposition—that’s only for those with a crystal ball. The rest of us need to assess life expectancy at regular intervals, because the longer you live, the longer you’re likely to live, as you can see below.
This table shows the odds of a 65-year-old reaching various ages. If you're married the chance that one of you will live to any particular age, as the surviving spouse, are even higher. And these are merely the averages. If you’re in good health at retirement, 90 is looking like the new 80.
Given these numbers, you can see why careful financial advisors build retirement plans assuming you will live until age 90—at least.
And Rob offers a more personalized approach: Add five years to the age of your longest-living relative. “The worst case is that you die earlier than you planned, so you leave more money in your estate,” he says. That’s preferable to underestimating your life span.
Adjust your portfolio
If you’ve just recalibrated your life expectancy, the next step is to make sure your retirement plan is, in fact, built to last as long as you need.
While nailing the proper asset allocation strategy for your portfolio is obviously important—hint: you’ll want to keep owning some stocks in your 70s and 80s to help protect against inflation—there are other pieces of the puzzle to consider.
- Optimize your Social Security claiming strategy, as well as your pension (if you have one), to provide the maximum benefit to the surviving spouse.
- Explore whether long-term care insurance makes sense for your situation.
- If you’re interested in having more guaranteed income in retirement, research the value (and timing) of a single premium immediate annuity.
Given the complexity involved, Rob suggests that you also consider adding another valuable asset to your plan: An advisor who looks holistically at all the pieces and helps you devise a plan built for the long haul. An advisor can look at the issue of longevity impartially—no mean feat for the average individual—and help manage the risks of not knowing how long, exactly, your retirement will last.