There are several significant unknowns that have to be dealt with when doing planning for retirement income. We don’t know exactly what investment results are going to be. We don’t know what kinds of unexpected expenses (probably for something related to healthcare) are going to show up – neither the amount nor the timing. We don’t know how future changes in tax policy might affect us.
But most of all, we don’t know how long we’re going to need to plan for. Because we don’t know how long we’re going to live.
This is the biggest of the unknowns; and because the answer can vary widely from one person to the next, the possible implications span a similarly wide range.
Wide range of possibilities not withstanding, the accepted way to move from the land of guessing in the direction of knowing, is to look at the averages. The people who compile and analyze such statistics are actuaries. Early in my career I was told that the definition of an actuary is “someone who invites accountants to their parties in order to liven things up…” It’s a job that requires being careful with your calculations, and likely requires a certain love of numbers, to boot.
Actuarial statistics are generated by a number of entities from the government world (Social Security, CDC and several other government entities keep and use data on mortality) as well as academia and the private sector. The profession itself is represented by the Society of Actuaries (SOA), and their website has all sorts of eye-crossing information available for the general public.
The conclusions vary a bit from one entity’s data-set to the next. But the consensus of all these sources of data seems to be this: If you have already made it to the age of 65, you will probably live into your mid to late 80s.
Note that this life expectancy is higher than the general life expectancy for the whole population. General life expectancy is for people being born today. In order to understand the difference, you have to think for a minute about the uncomfortable subject of when and how people die. To put it bluntly, if you have already made it to 65 then the probability of over-working yourself and dying of a heart attack at age 35 is no longer in the picture for you. If you are only a toddler though, you haven’t cleared that hurdle yet. So as a person gets older, they get past some of the things which unfortunately get younger people from time to time, and life expectancy ratchets upward accordingly.
If you have managed to stay alive until your 65th birthday, you will probably make it through at least 20 more. If you’ve made it to 70, then living into your late 80s or even 90 becomes more likely.
So back to our starting question, a 65 year old needs to be planning for at least 25 to 30 years of income. Maybe more, if they can.
When we do this type of planning work for clients we look to see if they could make it all the way to 105 years old. We don’t do that because we think they are going to live that long. We do it, in fact, specifically because the odds of them living that long are pretty small.
But since retirement income is a really big deal, it pays to use the engineering approach of stress testing. We look at lots of different scenarios so we can identify the ones where the whole thing will probably break. Because armed with that knowledge, we can make more informed decisions about what adjustments to make.
No one can predict the future, and no matter how much math you do it will remain the case that the length of your life will always be the big unknown in planning. But looking to what the averages say can move us away from having to guess blindly. And what those numbers say is that on average, a retiree today has a good shot at being around for many more years to come. Which is a good thing, provided you know how you’re going to pay for it.