Investing
January 20, 2017

Retirement Savings: What Age Should You Plan to Die?

Simple. Thrifty. Living.

The good news is that people are living longer, but the bad news is that many of us are financially unprepared for these longer lives. In fact, many people assume they’ll die much sooner than they actually will, and so they plan their retirement savings based on an unrealistic age. This is why people need to start planning their finances based on a longer life span, especially considering the fact that medical advances may have many people living well past 90. By making solid financial plans that will last you your whole life, you’ll not only ensure you have the money to live out the rest of your years in comfort, but also the peace of mind that comes with that knowledge.

Every year, the life expectancy seems to increase just a bit more. For example, the Centers for Disease Control and Prevention’s National Center for Health Statistics announced that a woman born in 2014 is expected to live until 81 and a man is expected to live until 76. However, these are just averages, and many people will live much longer. In fact, the key causes of death, like cancer and heart disease, which account for 44 percent of all deaths in the United States, have been steadily falling in number since 1999.

Each year brings new medical advances and other scientific breakthroughs that lead to an increase in life expectancy. However great these breakthroughs are, though, they also increase the chances that you’ll end your life without money if you don’t plan your finances the right way.

Furthermore, statistics indicate that couples need to base their financial planning on the expectation that they will live longer. For example, the Social Security Administration found that there is a 50 percent chance that both partners in a marriage will still be alive at age 78. There is also a 50 percent chance that at least one of the two will still be alive at age 89. In short, couples need to take into account that at least one of them will live for a significant amount of time.

Other information, like the U.S. Census’ U.S. Life and the Society of Actuaries Annuity 2000 tables, assumes even greater longevity than the Social Security’s data. All of this points to the fact that even 65-year-old clients should be operating under the assumption that they will live until 95. In fact, there is likely no genetic reason you can’t live until 90. You can also do a lot to increase your life expectancy, which is why exercise, improving your diet, and giving up any harmful vices like smoking are great decisions to make now.

A huge part of proper financial planning is expectations. One million dollars might be more than enough for you to retire on until you’re 100, but that greatly depends on your spending habits, how late you retire, unexpected emergency costs, and many other factors. All too often, financial advisers simply point to a dollar target for retirement savings, but often fail to discuss longevity issues and how much you’ll be spending per year.

That’s why it’s important to build a rough budget of what you expect you’ll need for each year of your life based on a longer life expectancy, and also keep an estimated 4 percent inflation rate in mind. You might find that the amount of money you had in mind might last you until you’re 60, 70 or even older, but you need to start building retirement models based on the potential that you or your spouse live much longer than that.

Financial planners sometimes use uniform assumptions for their clients even when life expectancies may be starkly different between clients. That’s why you or your financial planner should run a model that has you or your spouse living until at least 95 years old, and see what kind of spending you can sustain each year based on that life expectancy. The best online investment sites also include long-term planning when it comes to your retirement accounts, which can be helpful if you want automated help.

For those who want to hedge against the likelihood that they will live longer lives — especially based on the possibility of medical breakthroughs over the coming decades — then certain investments may work better than others. One of the possible investment vehicles is an annuity, which produces steady income payments throughout life.

Annuities represent traditional investments like pensions and Social Security, but there are other annuity investment forms that may also fit people who are worried that they will live beyond their initial investment. For example, immediate annuities allow you to pay an upfront lump sum that then pays a guaranteed income to you almost immediately. Deferred annuities, which are also referred to as longevity annuities, are also an option worth exploring.

By delaying your Social Security claim, you can take a big step to helping ensure you don’t run out of money before you pass away. For each year past your full retirement age that you delay your Social Security benefits, you increase your future monthly payout by a whopping 8 percent, which includes inflation adjustments. This is a risk-free and government-guaranteed way of securing your future against running out of cash, and these payments will continue throughout your life.

Ultimately, calculating how long you’ll live might not sound like much fun, but the fact is that most people actually live longer than they predict they will. Make sure that’s a good thing. By planning for a longer life, especially given the high probability that people will live progressively longer lives, you’ll be in an excellent position to secure your financial future.

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