By Brad Thomason
A couple of weeks ago the Centers for Disease Control (CDC) announced the updated life expectancy statistics or 2018. For the third year in a row, it declined slightly to just shy of 79 years of age.
What does this have to do with retirement planning? Essentially nothing. Which is why I’m mentioning it. I wanted to make sure you knew.
The general life expectancy numbers take into account all deaths at all ages. So the average figure that gets quoted every year includes things like infant deaths, teenagers having accidents, and so forth.
These factors don’t apply to people who are retired or those about to retire. If you are already 60 then the odds of dying as an infant are 0%. If you are 70, it necessarily means that you did not have a lethal accident when you were learning to drive.
In fact, if you look at life expectancy tables by age, you will see that the older a person gets, the higher the life expectancy climbs. People who are 60 have a lower life expectancy than those who are 70, because some of them will die in the next decade and those deaths pull the average down. Those who are already 70 have to die at 70 or some later age, which in turn pulls the average up.
(Misunderstanding of this basic principle leads to stupid internet articles in which someone touts the idea that people who retire later in life live longer, as if continuing to work has some mystical life-sustaining effect. It doesn’t. It’s just that if you don’t retire until 70 it means you couldn’t have died when you were 68, or whatever…)
Using the general life expectancy statistic for purposes of retirement planning is the wrong approach for two reasons. The first, as we’ve discussed, is that it does not pertain to the portion of the population that needs to use it: those at or approaching retirement age.
The other reason is because life expectancy is itself just a measure of the average result. Essentially life expectancy says that if we started out with 100 people of a given age, the point at which we would expect half of them to have died is what we’re measuring.
So if 100 people used any particular life expectancy (for people who are already 65, it would be about 86) then half the people in the group would be expected to live past that age.
In other words, if all 65 year olds assumed they would die by 86, and used that as the gauge for how many years of income they would need to cover, half of them would run out of money due to living past 86.
So if the general life expectancy is too non-specific, and the particular life expectancy is only suitable half the time, what number should we use?
One approach is to look at the ages at which people are dying right now. If you look at all of the deaths for a given year, by age (which is also a stat that the CDC tracks), what emerges is a rough sense that about 95% of the deaths of retirement-aged persons (65 and older) in a given year occur by about age 95.
But even that number is a little deceptive, because affluent persons tend to live a bit longer. And people who have enough money to make it to 95 in the first place have more resources than what’s average/typical.
Also, the thing we really want to measure is how many years of income are required for the household, not the individuals. So for married persons, the death of the first spouse is not really a factor (and if we were to take those out it would mean we’d need to go to a higher age to get to a true 95%).
Finally, if a person in their sixties is doing this assessment right now, it is not a stretch to think that medical advances over the course of the next three decades could have an impact on all of this by the time they get to that point.
Anyway, back to the question: I can’t tell you the one best number that you should use, because I’m not sure it’s an answerable question. But in practice I am always resistant to the idea of projecting to any age less than 95, and frequently like to look to see what would happen if we moved it out to 100 or even 105. Doesn’t cost anything to jigger a few numbers on a spreadsheet, and sometimes doing so can lead to important insights.
But all of that said, the main point is that the CDC announcing a new average life expectancy is not an event which has any bearing on retirement planning. And I just wanted to make sure you knew that, and why.
By Brad Thomason, CPA
It will not be a surprise to you that most people would like to know how much money they need to retire on. It’s not a surprise, most likely, because you are one of those people.
The good news is it’s a number that we can find. Or at least approximate. But we can’t always do it quickly, and there’s always some uncertainty involved.
To understand why, consider a couple of scenarios involving a bucket of water with a small hole drilled in the bottom.
If I told you how much water was currently in the bucket and the rate at which it was leaking out, you would have little trouble figuring out how long until the bucket was empty.
But what if the bucket were outside, there were rain showers in the area, the neighbor’s dog might stop by for a drink or two, and the hole in the bottom was getting bigger the longer the water was draining out?
Not so straight forward anymore, is it?
In trying to determine how long our retirement money will last, we know that we have to know how much we’re starting with and the rate at which we’ll be spending it down. But we also have to account for the fact that the principal may earn some returns before we spend those particular dollars (i.e. like rain falling to partially refill the bucket). We know that there might be unexpected items to pay for – probably healthcare related, but not necessarily – which can further deplete what we have (i.e. like that pesky dog). Finally, there will be inflation; and the effect of inflation will become ever-greater as time goes on, accelerating the rate of depletion at an ever-accelerating pace (i.e. like a hole in a bucket that magically gets bigger with time).
If we don’t account for all of those factors, our odds of being even close with our estimates are not very good.
We all want simple answers. We’ve usually got other things to do, and even when we don’t we don’t want to spend our time breaking our heads over tedious lines of thought. I get it.
Problem is, whether we want simplicity or not, little is on offer when it comes to retirement planning.
In boxing they have an expression for dealing with unfavorable moments: bite down on your mouthpiece and keep going. There’s nothing wrong with wanting it to be easy. It only becomes a problem when the fact that it isn’t easy stands in the way of us doing it. This is one of those areas in life – like getting hit in the face – where you need to press on in spite of the fact that it isn’t any fun.
If you don’t know your number, you need to. Or at least a range which takes into account some realistic expectations about return levels and longevity.
Precisely hitting projections that are decades away is not a real high-probability activity, even under the best of circumstances. Still, you need to go through the exercise. That’s because what you most need to know about are those scenarios which have little if any chance of succeeding, the ones in which running out early are likely or even inevitable. Preferably you find out about them while you have enough time left on the clock to do something about them. Which, back to the top, is why you need to look now instead of later.
The end of the year is coming up, and that is always a good time for some assessment and thinking. If you don’t know where you stand, why not find out? If you need to make some changes, start thinking them through. And if you need some help putting them in place, give us a shout…though preferably after the first of the year. Looking at my schedule for closing the year out over the next four weeks, it is evident that I’ll need to be biting down on my mouthpiece, too.
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