Smoke and Mirrors: Life Expectancy and Financial Planning

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In writing a financial plan there are many factors to consider. Key factors to be considered are: inflation rate— CPI, CPI-U: rate of return on investments— historic and projected; income needs and life expectancy. Lately, I have become convinced that life expectancy is the most critical of all the variables and the one most likely to derail a financial plan.

Recently, I spoke at a major financial planning conference. The attendees of the conference were the brightest and the best in the financial planning field. My topic for the conference was how to model health care expenses for retirees in a financial plan. When I shared with the audience that our firm models all of our plans to age 100 the ‘Twitter-verse’ erupted.

The responses on Twitter fell into two broad categories: one group felt that I was too conservative in my assumptions and the other group felt that I was spot on. After the presentation, I met with the conference sponsors. They were delighted with the presentation because it had generated the most Twitter responses of the conference.  Obviously, the issue of life expectancy in financial planning had struck a nerve with the participants.

When I was born the average life expectancy for a male in the United States was 67 years and for a female it was 73 years. Today the average life expectancy for a male is 76 years and for a female it is 81 years. Looking at these numbers one might presume that many of us are likely to live until the age of 80 or beyond. However, there is more to life expectancy than the mortality tables.

The Society of Actuaries has figured that for a couple where each is age 65, there is an 85 percent chance that one of them will live past the age of 85. Individuals who retire as a couple do live longer than the individuals in the population who are single. Pension administrators and insurance companies have long known this fact. This is why there is such a drastic reduction in the pension benefit—up to 25 percent, if the retiree wants to provide a survivor benefit.

Also, the older you are, the longer you will live. This is not rocket science. If someone is age 67 today, their life expectancy is age 91! And if that individual is married, then age 97 is a reasonable expectation for life expectancy of the survivor of the two of them.

Lastly, there is that nasty business of statistics. The life expectancies, which I have been discussing, are the statistical mean. There is always a possibility that you may be that 30 percent (Standard Deviation) which lives beyond ‘normal’ life expectancy.

Yes, we do plan to age 100, perhaps I should be considering age 110.

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