Longevity Planning: How to Make Sure You Don’t Outlive Your Money
Most people face a variety of unknowns in planning ahead for retirement. They include future inflation, interest rates, medical costs and investment market performance. Also, many of today’s retirees are questioning whether the benefits promised by Social Security and Medicare will materialize years from now. While these issues can determine retirement planning success, the biggest “question mark†of all may be longevity – how long retirement may last.
A good starting point for estimating longevity is a standard life expectancy table. According to these tables, women in the U.S. are outliving men by about 3-4 years on average. For example, a 60-year old woman currently has an average life expectancy of 23.1 years, to about age 83, while an average man of the same age can expect to live another 19.8 years, to about age 80. (This data is drawn from the Social Security Administration’s Period Life Table.)
Life expectancy tables are reliable guides for estimating the average longevity of large populations, but they have a flaw in personal planning. By definition, half of all people will outlive the average, and a small minority will live well beyond the average. For example, for every 100 U.S. women age 60, about 26 will reach age 90; for every 100 men, about 14 will survive to 90, according to Social Security.
Clearly, the retirement planning challenge changes when an individual’s “longevity horizon†shifts from age 80 to 90. If retirement assets and income must stretch a decade longer, the need to make good choices and smart decisions increases, as does the risk of mistakes.
Of course, longevity is determined by more than life expectancy tables and chance. Each person’s profile and lifestyle decisions also influence how long retirement may last. People who don’t smoke, have normal blood pressure, exercise regularly, and are of normal weight stand the best chance of living longer.
The Impact of Inflation on a Fixed Income-An important goal of retirement planning is to avoid depleting assets or running short of income in old age. If retirement planning decisions are based on an average life expectancy, individuals have a 50% chance of outliving their money. A more conservative approach is to plan for a retirement that will last several years beyond average life expectancy. Of course, the longer a retirement lasts, the greater impact inflation may have on the purchasing power of a fixed income. The table below shows the probability of living from age 60 to various ages and also the reduction in purchasing power for each dollar of fixed income that starts at age 60. It assumes that inflation averages a constant 3.5% in retirement, using $100 in this examply.
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  Male     FemaleÂ
70Â 82.6%Â Â 88.6%Â Â Â $70.89
75Â 68.8%Â Â 78.6%Â Â Â Â $59.69
80Â 51.5%Â Â 64.9%Â Â $50.26
85Â 32.1%Â Â 46.8%Â Â $42.31
90Â 14.5%Â Â 26.3%Â Â $35.63
95Â 3.9%Â Â Â Â Â 9.7%Â Â Â Â $30.00
100Â 0.5%Â Â Â 1.9%Â Â Â $25.26
Source: Social Security Period Life Table updated 6/27/06. Social Security Administration.
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Income Sources That Can Last a Lifetime-Fortunately, it is possible to build retirement security on a base of income sources that can last a lifetime. These sources can form a foundation of longevity planning, especially for individuals who believe they may live well beyond an average life expectancy:
• Social Security – Under current law, Social Security retirement benefits will be paid for life to covered workers and their spouses. But changes in the Social Security system are probable in the years ahead, and it is not yet clear how retired people will be affected. Until changes are resolved, it may not be prudent not to count on Social Security for most of lifetime financial security.
• Pensions – In the past, many employers have paid lifetime pensions to workers and their spouses. But pensions have lost favor in recent years as more companies have shifted to personally-funded retirement plans, such as 401(k)s.
• Guaranteed Income Annuities – Life insurance companies offer guaranteed income streams payable for life, and the income can include annual increases that help to offset inflation. Because income annuity decisions may be irrevocable, it’s wise to compare the choices carefully with professional help.
In summary, it is possible to factor personal heredity and healthy living habits into your retirement outlook, along with a desire to plan for a period of time somewhat greater than average life expectancy. In this process, a qualified financial professional with experience in retirement issues and exit planning  can be a valuable resource.
Steven L White
Wealth Strategies Group
