LIFE EXPECTANCY AND RETIREMENT
While most Americans now expect to live longer than previous generations, that understanding has made little impact on their planning for retirement. With average life expectancy advancing into the late 70s and significant numbers of Americans expected to live into their 90s, very few people have saved enough money to live their pre-retirement lifestyle for 30 or even 40 years.1
Retirees want their retirement income to last as long as their retirement does. And they want this to happen without having to cut back on their pre-retirement lifestyle. To do this, retirees need to avoid several misconceptions about how long they'll really live in retirement.
The Dangers of Planning Based on Life Expectancy
First of all, life expectancy is only an average. That means about half of all the members of a certain age group may live past their life expectancy. So if your retirement plan pivots on you using up all of your income by the time you reach your life expectancy, you run about a 50-50 chance of ending up broke at an advanced age.
Second, life expectancy is not a constant, but rather a moving target. If you've reached 65 already, your life expectancy has already increased. After all, you've survived many members of your age cohort who died before you. Your new life expectancy based on your current age is called your longevity, and longevity is a more accurate assumption on which to base your retirement income planning.
Consider this: While life expectancy for Americans born in 1938 was around 64 years, those Americans who are currently 65 are projected to live another 18 years to age 83, on average.2 And, if you reach age 83, your life expectancy extends to age 90.
And here's one final thing to keep in mind: While a 60-year old man today has a 20 percent probability of reaching 95 and a 60-year-old woman a 30 percent chance, there is a 40 percent chance that at least one member of a married couple at the same age will live until 95.3 Retiring couples need to consider this increased probability when planning for retirement.
Risk Vs. Comfort
So making retirement income projections should involve balancing the risk of drawing down your income too quickly and being left with little to live on in your 80s or 90s and the opposite conundrum of spending your income too slowly and needlessly crimping your retirement standard of living.
You need to understand your own odds to navigate between these two rocks. In order to reduce his risk of running out of money to 10 percent, a 61-year-old man retiring today should create a retirement income plan that takes him to age 93, while a woman in the same situation should plan on living—and paying for—three years longer, to age 96.1
Look Ahead With Confidence
It's natural not to want to consider your own mortality. Many workers planning for retirement and even those on the cusp of retiring see life after work as a golden time stretching into a hazy horizon. It can indeed be a wonderful second act, but that will depend on your taking an honest look at how far away that horizon really is.
You won't live forever. But you may live longer than you expect. Used correctly, life expectancy and longevity can be powerful planning tools that can help provide a truer picture of what you have to do to make your retirement years both comfortable and secure. No matter how long they last.
Talk to Wachovia Securities
Understanding how to incorporate life expectancy into your retirement planning is essential to putting together a retirement income plan that truly meets your needs. Few people approaching this exciting time in their lives have all the answers. That's why sitting down with a Wachovia Securities Financial Advisor can help you make more informed and realistic decisions about what lies ahead.
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