Upsides to thinking about day you will die

Calculations can help figure spending plan

Social Security’s life expectancy calculator predicts I’ll live to 86. An insurance company’s version says I should expect to die at 98. A longevity calculator created by actuaries demurs, putting the odds at only 32 percent that I’ll make it to 95.

Eventually, I’ll find out which life expectancy calculator was most accurate. In the meantime, the different results help illustrate one of the most important and difficult calculations in retirement planning: figuring out when it will end.

People who underestimate their life expectancy could save too little for retirement and run short of cash. People who overestimate how long they’ll live might stay in the workforce longer than they want to or spend less in retirement than they could.

Why it matters

Assumptions about life expectancy can make a dramatic difference in retirement strategies. For example, people who expect their retirement to last 20 years could withdraw 4.7 percent of their nest egg the first year and have a 90 percent chance their money would last, according to calculations by David Blanchett, head of retirement research at Morningstar, an investment research firm. To have a similar success rate with a 30-year retirement, the initial withdrawal would have to drop to 3 percent.

Given those assumptions, someone who wanted to withdraw $25,000 the first year from their retirement funds would need to save about $532,000 to fund a 20-year retirement. Planning for a 30-year retirement would mean saving $833,000, or 57 percent more.

Life expectancy also can be a factor in when people should start Social Security, which can start as early as 62 years old. But most people live long enough that the larger checks they can get from delaying their applications at least until full retirement age, which is currently 66 and rising to 67, more than offset the smaller checks they give up in the meantime. But those in poor health with shorter life expectancies may want to start getting their checks earlier.

Life expectancies differ

The first thing to keep in mind is that the longer you live, the longer you’re likely to live. At birth, the average U.S. male has a life expectancy of about 76 years and the average female 81 years, according to the Social Security Administration. If you make it to 65, though, the average man can expect to live to nearly 83 and an average woman to 85.

Also, married couples need to plan for longer life spans. That’s not only because married people live longer than singles, but also because the chance of either person being alive at a certain age is typically greater than their individual chances. There’s a 50 percent chance at least one member of a married couple, both age 65, will be alive at 92, according to the Society of Actuaries.

Other factors can add or subtract years from someone’s life expectancy. The more income and education you have, the longer you are likely to live. Race, lifestyle, health and family history play significant roles, too.

Some life expectancy calculators, like the Longevity Calculator created by the Society of Actuaries and the American Academy of Actuaries, use just a few of these factors. Others, such as the Living to 100 calculator, pose dozens of questions about various aspects of your life, health and family members’ health.

Interestingly, few calculators ask about race, even though that can have a profound impact on life expectancy even when controlling for other factors, such as education and income. For example, one study found that Black men and women with 16 or more years of education lived on average 4.2 years less than similarly educated whites and 6.1 years less than Hispanics with the same education level.

How planners estimate

CFP and physician Carolyn Mcclanahan of Jacksonville, Fla., factors in the client’s financial resources, health and family history. If a client’s funds are projected to run out in their mid-80s and they’re in good health or have long-lived relatives, Mcclanahan will help them work out a Plan B.

“We discuss potential ways to reduce spending or the possibility of tapping home equity at some point,” she said.

Morningstar’s Blanchett suggests creating a personalized estimate using a life expectancy calculator that at least factors in gender, smoking status, income and health, then add a few years to create a cushion. He suggests adding five years to the personalized life expectancy estimate for a single person. For married couples, he recommends adding eight years to the longer of the two life expectancies.

We can’t know for sure when retirement will end but an estimate helps us know how much to save and spend in the meantime.