Retirement planning involves a delicate balance between adequately planning for a long retirement and maximizing the enjoyment of the money you’ve worked hard to accumulate. In most cases, a retirement that lasts 35 years will require far more financial resources than will one that lasts 20 or 25 years. What is more, the final years of retirement may be the most expensive, as costs associated with chronic or end-of- life care come due. Advances in medical technology have extended life expectancy for many, but certainly not all, demographics. Longevity is a critical consideration of retirement planning, but so too is recognizing that living to an advanced age demands more retirement savings or a lower lifetime income, and whether this is justified based on your current health, lifestyle and family history.
According to the National Center for Health Statistics, the remaining life expectancy for a 65 year old male has increased from 14.1 years in 1980 to 18 years in 2014, while female life expectancy over the same period has increased from 18.3 years to 20.5 years. Diseases that were once fatal can now be managed through medication. Advances in medical technology, which are largely beneficial to society, bring related costs associated with certain diseases, such as Parkinson’s or Alzheimer’s, that become more prevalent as we age. And while the gap in life expectancy between the African American and non-Hispanic White populations have decreased from 5.9 to 2.3 years- largely due to better treatment for heart disease, cancer and HIV- a troubling gap in longevity persists when educational attainment and income are added to the mix. Not surprisingly, another factor that positively correlates to longevity is access to health care. Of those individuals that have lived to age 90 or beyond, more than 99% are covered by health insurance.
How to make sense of it all? Financial planners have traditionally taken a conservative approach to estimating life expectancy, often assuming mortality at age 90 or beyond. For some, this possesses the dual benefits of helping ensure clients don’t spend too much, and gracefully avoids difficult conversations surrounding a client’s specific health and risk factors. The drawback, however, is the potential to unnecessarily defer retirement or reduce spending. While those in poor health with known risk factors, or those in excellent health with a family history of longevity, may find these compromises to be straightforward, most people fall somewhere in between these extremes and will not. Thankfully, technology has lent a helping hand by making it easier to estimate and facilitate conversations about life expectancy. Life expectancy calculators, like the one found on Living to 100.com, when combined with thoughtful conversations with a physician, may help people better estimate how much longer they might live.
How much of an impact will an extra ten years of assumed life expectancy have on retirement readiness and lifetime income? A single individual retiring at age 67 with an annual income of $75,000, retirement savings of $750,000 and $23,450 of annual Social Security income would enjoy a total of $60,000 per year of retirement spending that increases at 2% each year until age 90. If planning for an additional ten years of retirement, the same individual would require approximately $1,000,000 of retirement savings, or would have to reduce their annual spending more than 16% per year from $60,000 to $50,250 per year. This simple analysis ignores the cost of long-term care, adverse investment results and other factors that may derail retirement, but nonetheless paints a vivid picture of the costs associated with planning for a lengthy retirement.
While there is no blueprint for difficult discussions surrounding health, aging and death, there are simple guidelines that professional advisers and family members can take to help facilitate a healthy dialogue.
- Help the individual identify how their current health, lifestyle and family history may affect their life expectancy, and that of a spouse or partner.
- Ask whether having additional clarity is welcome, or may prove burdensome. When contemplating one’s own death, ignorance may indeed be bliss.
- When appropriate, encourage a frank discussion with medical professionals to better assess how specific factors may impact remaining life expectancy, and whether they can be mitigated.
- Accept that estimates of life expectancy need not be perfect to be useful.
- Encourage individuals to address aging and retirement planning in phases, and consider the financial and non-financial resources required during each phase.
- Help people prepare for a time when they may lack the cognitive ability, focus or desire to manage their affairs. Be sure to involve family members and caregivers in these conversations.
- Be flexible. Update your assumptions and spending plan regularly to reflect current information.
Financial planners have a responsibility to help shape the dialogue around retirement income and savings. They are also well positioned to point out the potentially devastating impact that underestimating life expectancy could have on their client’s retirement income and overall preparedness. While rarely straightforward, these discussions can help facilitate more thoughtful decisions surrounding financial planning, aging and end-of-life care.