How life expectancy figures into retirement planning

To effectively plan for your retirement, experts say, you need to look at your savings rate and total nest egg.

But how much you really need to set aside depends on another number – your life expectancy.

However, this figure is also more elusive – no one knows how long they will live.

“No one really knows, and that uncertainty is uncomfortable,” said Lisa Schilling, director of practice research at the Society of Actuaries Research Institute, the research arm of the Society of Actuaries.

The financial industry typically uses age 95 as a default assumption, according to research from HealthView Services, a provider of health care cost projection software.

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Rather than planning for a life expectancy number, the Society of Actuaries and the American Academy of Actuaries emphasize life expectancy.

Life expectancy risk measures the likelihood that someone may live longer than expected and outlive their savings.

“If you read that life expectancy is 84 and you’re planning for your money to last until 84, there’s a big surprise behind the curtain that you haven’t opened,” Schilling said. “There’s a really good chance for a lot of reasons that you might need your money to last longer than that.”

The Society of Actuaries and the American Academy of Actuaries recently launched a free online life expectancy illustrator.

The tool asks for basic information about either an individual or a couple: age, gender, retirement age, smoking status and a description of their overall health – poor, average or excellent.

The results are intended to provide a “reasonable” estimate of how long you might live, according to the organizations. The illustrations show the probability of living to certain ages, as well as the number of years of life one can live in retirement.

In general, the higher your actual age, the greater the chance that you will live longer. While life expectancy at birth can be 84 years, it will be even longer if you’ve already reached age 65, Schilling said.

The results can help individuals fully understand the range of possibilities when planning how long they might need to make their money last, she said.

For couples, there is another discovery that often comes as a surprise. “The chance that at least one of you will live to 90 is even greater,” Schilling said.

However, the financial industry’s assumption of living to age 95 may be too generous, according to recent research from HealthView Services.

The life expectancy for someone who is 65 today without chronic disease is age 90 for women and age 88 for men.

However, only about 5% of people over 60 do not have a chronic disease, according to research.

Chronic health conditions such as high blood pressure, cardiovascular disease, cancer, diabetes, high cholesterol, tobacco use, obesity, or Parkinson’s disease reduce an individual’s life expectancy.

For example, while a healthy 65-year-old man with no chronic conditions has a 19.3% probability of living to age 95 or older, this drops to a 17.5% chance if he has high blood pressure, 15.8% if he has cardiovascular disease. diseases, 12.5% ​​for high cholesterol, 8.8% for obesity with a body mass index of 35 to 39, 7.4% for tobacco use, 2% for obesity with a body mass index of 40 to 44 and in only 0.4 % for diabetes, according to research.

These probabilities could mean a big change in his retirement funding needs. A healthy 65-year-old man may need about $1.1 million to maintain the 80% income replacement rate he would need if he were to earn $100,000 in 2023, according to HealthView Services. This assumes he lives to age 95, has an annual portfolio return of 6%, receives Social Security benefits, and inflation is 3%.

However, if the 65-year-old has a chronic condition, his life expectancy will be lower. And that can free up more of that retirement nest egg to spend in other ways, according to HealthView Services.

High blood pressure could reduce his life expectancy by nine years at age 86, and therefore allow $447,469 to be used for long-term care planning, emergency savings, money for heirs or other uses, the research found.

Tobacco use can reduce his life expectancy by 13 years to 82, freeing up $616,245, the research estimates, while diabetes can reduce his life expectancy by 16 years, enabling him to spend $727,947.

Most experts advise individuals to plan for the survival of their assets by delaying Social Security retirement benefits or considering an annuity to increase monthly income.

But considering an individual’s specific health status and how it affects their life expectancy can help personalize financial plans, according to Ron Mastrogiovanni, CEO of HealthView Services.

“During a planning process, people are more likely to take action if the numbers are personalized,” Mastrogiovanni said.

That doesn’t necessarily require eliminating the 95-year-old presumption, he said.

But letting someone know their personal life expectancy can help provide a more reasonable sense of an age to plan for.

“It doesn’t mean you pick that number” to plan, Mastrogiovanni said.

“Whatever makes you comfortable; you want to go four years, 10 years, you can do that,” he said.

“But at least you’re working with a basic actuarial number.”