I hope your week is going well.
One of the risks to one’s retirement that is often overlooked is longevity risk – the risk of living longer. When I review a retirement income analysis I’ve completed for a couple, I often hear the man say “Running out of money at 85 is fine – I won’t live that long anyway”. Is that true? Let’s look at this further.
The government publishes life expectancy tables which show average life expectancy (50% chance of dying before, 50% after) for males to be around 78 and females to be around 80-81 (see linked article below). However, that is based on the birth-to-death population which includes all those who die early. If you ask how long someone who is 60 today will live, the 50/50 chance is 80 for men and 83 for women. At 65, it goes to 81.5 for men and 84 for women; at 70, it is 83 for men and 85 for women. However, that may not even be correct in that it is looking at the population taken as a whole. When one looks at the population of middle and upper income people (those more likely to have worked in less physically taxing occupations), the life expectancies go up about 3-4 years for every age and gender. Again, remember that this is a 50/50 probability. Therefore, if one wants to be reasonably certain of not running out of money before death, most planners look at ages in the mid-90’s which is surely different than the guy who’s convinced he will die a decade or more earlier.
Assuming too short a life expectancy can place you in serious financial straits if you happen to outlive your own expectation or the tables. Why? Let’s say your financial plan shows you being in reasonable shape through 85, at which point your savings are depleted leaving you with Social Security and maybe a pension. When you were 65, these two income sources covered about 75% of the income you needed, leaving 25% to be covered by your savings. However, years of inflation have required an accelerated use of savings such that they are gone. Now, your Social Security and pension only cover 30% of your income need but that’s all you have. Obviously this requires a massive reduction in lifestyle which we would all prefer to avoid. The situation is further complicated by the great difficulty one would have in finding a job and returning to the workforce at age 80 or 85. The second article linked below references the tendency that people have to underestimate their longevity.
There is another dangerous consequence from running out of money – you leave an impoverished spouse. When the first of a married couple dies, the surviving spouse loses the smaller of the two Social Security checks and, if there is a pension, likely loses half the pension. While expenses may go down a bit, it is unlikely that expenses decline proportionately with income, thereby forcing the surviving spouse to withdraw funds from savings at an even faster rate. If the savings are gone, then there’s no choice but to make deep cuts in one’s lifestyle. That is often very difficult because it frequently comes at a time when healthcare needs are high and long term care issues are on the horizon.
In summary, recognizing risks to your retirement security and applying strategies to effectively mitigate those risks is a central part of the financial and retirement planning process. Please call me if I can help you navigate these waters.