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Live Long and Prosper: Use Life-Expectancy Calculators for a Better Retirement Plan

Long life is great, but you've got to plan for it

Close up of hands using a calculator next to a stack of wooden blocks marked with decades of age from "after retirement" to "100 years old".
iStock / Getty Images

How long will you be retired?

Few questions matter more to a worker saving for the future or to a new retiree. Yet few questions are harder to answer.

Sure, many of us can control the start date for our retirement. But the end date — how long we will live — can’t be predicted with any certainty. And that means we can’t estimate the number of years we’ll need retirement income, the amount of savings we’ll need to fund that income, and what lifestyle and extra perks we can enjoy with those savings.

“Longevity risk — the risk of running out of assets before you run out of time — is one of the things retirees fear most,” says Wade D. Pfau, codirector of the American College of Financial Services Center for Retirement Income. “A long life is a great outcome, but it brings a large financial burden.”

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Planning for that burden is critical. Fortunately, you can get valuable tools online to provide a range of estimates for your life expectancy (and, in some cases, your combined longevity with your spouse). We’ll show you how to use those tools so you can prepare for a long retirement.

Why it matters

Retirement savers start with one advantage: Social Security. The program is almost universal and is designed to provide automatic longevity protection — benefits for life, indexed to inflation. For many lower-income workers, Social Security will replace a large share of their employment income.

Traditional pensions also can provide lifetime income, although usually without inflation protection. But they’re disappearing, outside of government employment.

Even with these sources of protected lifetime income, life expectancy matters. Retirees who can afford to defer claiming Social Security to as late as age 70 can get greater lifetime benefits, but only if they live long enough. (The break-even age, when larger monthly checks make up for the benefits forgone by deferring to age 70, is usually between 80 and 85.) And with a pension, couples need to decide whether to give up some current income in favor of survivor benefits, another decision driven in part by longevity.

But the longevity challenge is most important for higher-income workers who’ll depend on their investments for their retirement income. For them it’s critical to have a firm handle on how long those investments must last to sustain them.

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“We’re in more of a do-it-yourself retirement world now, and good planning is essential,” says Linda K. Stone, senior pension fellow at the American Academy of Actuaries. “Awareness of just how long you’ll live is particularly important for women because they live longer. No one likes to think about living alone, but one member of a couple can usually count on about 10 years of widowhood.”

Unfortunately, savers run the risk of underestimating life expectancy — when they think about it at all. “Research shows that most people aren’t very good at estimating how long they’ll live,” says David Blanchett, head of retirement research at PGIM, the global investment management business of Prudential Financial. “The errors go in both directions — too short and too long — but the risks of guessing too short and outliving your assets are obviously greater.”

To make matters worse, Blanchett’s research shows that financial advisers don’t always help clients set realistic planning horizons. In a review of more than 31,000 financial plans, Blanchett found that 70 percent of them used 90 as the target age and another 20 percent used 95 — a remarkable degree of unanimity for a diverse population of clients. Few planners took into account the longer planning horizon that a couple needs, Blanchett noted.

What goes into calculating life expectancy?

So how should you figure out that planning horizon? A quick internet search can turn up a dozen or more “life expectancy estimators” or “longevity illustrators” — but they aren’t all equally useful.

Take, for example, the Social Security Administration’s Life Expectancy Calculator. That tool uses just two factors — gender and date of birth — to return the average number of remaining years that someone of your age and gender can expect to live. But the SSA’s methodology ignores the historic trend toward longer life expectancies. (From 1940 to 2018, the average life expectancy for a 65-year-old man increased from 11.9 years to 18.1 years. The improvement has slowed but is still a factor in making accurate estimates.) That biases the Social Security calculator’s results toward underestimating life span — and boosting your risk of running out of money.

With private calculators, you have a choice of what to emphasize: health or wealth. Health-oriented calculators (such as Living to 100Blue Zones Vitality Compass and Blueprint Income) take in as many as 40 data points — on diet, exercise, family history and health markers — to produce a life expectancy. Their output usually comes with tips on how to increase your life span, along with plugs for newsletters and financial planning services.

On the wealth side, two big insurers offer longevity estimators: Sun Life’s Life Expectancy Calculator and John Hancock’s Life Expectancy Calculator. Each requires about a dozen inputs; each comes with a fairly understated ad for the company’s policies. And each produces just one number as the output — your median life expectancy, the age that you have a 50 percent chance of reaching.

That’s useful information but not enough. “No one should be using the 50th percentile in their planning — by definition, you have a 50 percent chance of living longer,” says Pfau of the American College of Financial Services. For your finances, you need to plan out to the age that you have a 25 percent chance of outliving, Pfau says, or, if you want to be very cautious, the age at which you have only a 10 percent chance of survival.

The best calculator for uncovering those probabilities is the Actuaries Longevity Illustrator, developed by the American Academy of Actuaries and the Society of Actuaries. This tool doesn’t just spit out a single age; rather, it tells you your probability of a long life, along with your chances of living to a given age or a given number of years. A man with a median life expectancy of 88, for example, may have a 25 percent chance of living to 93 and a 10 percent chance of reaching 98 — another 10 years of income to fund.

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(Instead of providing a raft of health questions, the Actuaries Longevity Illustrator asks only about age, sex, smoking status and your own assessment of your health as excellent, average or poor. Blanchett says that’s sufficient, as his research shows that most people do an accurate job of self-assessing their health.)

The other good reason to use the actuaries tool: It’s the only estimator we’ve seen that can calculate joint life expectancy for both members of a couple. That 68-year-old man has a 50-50 chance of living another 20 years, but his 66-year-old wife has even odds of living 24 years, and there’s a 50 percent chance that one member of the couple will be alive 27 years from now. “For a couple, it’s vital that they plan based on joint life expectancy,” says Derek Tharp, president of Conscious Capital and assistant professor of finance at the University of Southern Maine.

How to use life expectancy in your planning

Now that you know your life expectancy — or your chances of surviving to a range of ages — how do you apply that in your retirement planning?

If you’re still working and haven’t yet set your retirement date, you need to weigh whether your current savings plan will support the life expectancy you’ve calculated. Saving more or working longer can build a cushion against the risk of having more life left than money. (Working longer not only increases the amount you can save but reduces the amount of time you’ll need your money to last.)

If you’re entering retirement, you’ll need to match your spending rate to the number of years that you expect to live. Most planners use the 4 percent rule, which says that your initial withdrawal can equal 4 percent of your savings; after that, you can adjust your withdrawal for inflation. The rule is premised on 30 years of retirement; if your planning horizon is significantly longer, you’ll need to adjust either your spending or your portfolio to that reality. That may mean a lower level of discretionary spending on travel or hobbies. Or it may mean pre-funding essential spending in your old age by purchasing annuities to provide reliable income no matter how long you live.

(If your planning horizon is shorter, you can loosen the spending reins a bit. But the financial risks of living longer still outweigh those of spending too little.)

What matters most is getting an objective handle on your planning horizon. “The goal is a personalized number that makes you feel safe and comfortable,” says PGIM’s Blanchett. “It only takes five minutes to run the calculator, and the knowledge is good for years.”

Mike McNamee has written about personal finance, tax policy, health care and economics for BusinessWeek, USA Today and financial organizations.

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