When it comes to planning for retirement, financial experts often stress the importance of monitoring savings rates and the total nest egg. However, one crucial factor that often gets overlooked is life expectancy. While estimating how long you will live is uncertain and uncomfortable, it plays a significant role in determining how much money you will need during retirement. The financial industry typically uses age 95 as a default assumption, but this may not be accurate for everyone.
Longevity risk refers to the likelihood of someone outliving their savings due to living longer than expected. Planning for a single life expectancy number may not be sufficient, as there is a high probability that you may need your money to last longer than anticipated. The Society of Actuaries and American Academy of Actuaries emphasize the significance of considering longevity in retirement planning to avoid financial shortfall during retirement.
Using the Longevity Illustrator Tool
To help individuals better understand their life expectancy and plan accordingly, the Society of Actuaries and American Academy of Actuaries have developed a free online longevity illustrator tool. By providing basic information such as age, sex, retirement age, smoking status, and general health description, the tool offers a reasonable estimate of how long an individual or couple might live. This tool aims to show the probability of living to specific ages and the number of years one might live in retirement.
Chronic health conditions such as high blood pressure, cardiovascular disease, cancer, diabetes, high cholesterol, tobacco use, obesity, or Parkinson’s disease can significantly impact an individual’s projected life expectancy. For example, a 65-year-old man with no chronic conditions may have a 19.3% probability of living to age 95, while this probability decreases if he has underlying health issues. Understanding how these health conditions affect life expectancy can help individuals personalize their financial plans accordingly.
Personalizing Retirement Planning
While experts recommend planning for outliving assets by delaying Social Security benefits or considering annuities, considering an individual’s specific health status and its impact on life expectancy can help tailor financial plans. Providing personalized numbers can motivate individuals to take action and make informed decisions about their retirement savings. Instead of relying on a generic age assumption, understanding one’s personal life expectancy can offer a more realistic approach to retirement planning.
Life expectancy is a critical factor that should not be overlooked when planning for retirement. By considering the impact of longevity risk and health conditions on life expectancy, individuals can make more informed decisions about their financial future. Personalizing retirement planning based on individual circumstances can help ensure a comfortable and secure retirement.