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To plan for retirement effectively, experts say, pay attention to your savings rate and overall savings rate.
But how much you should actually put aside depends on another number: your life expectancy.
But that is also the most elusive number: no one knows how long they will live.
“No one really knows and that uncertainty is uncomfortable,” said Lisa Schilling, director of practice research at the Society of Actuaries Research Institute, the research arm of the Society of Actuaries.
The financial industry typically uses an age of 95 as its default assumption, according to research from HealthView Services, a provider of healthcare cost forecasting software.
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Instead of planning based on one life expectancy number, the Society of Actuaries and the American Academy of Actuaries emphasize lifespan.
Longevity risk measures the chance that someone will live longer than expected and outlive their savings.
“If you read that life expectancy is 84 and you plan to make your money last until you're 84, there's a big surprise behind the curtain that you haven't opened yet,” Schilling said. “There's a good chance that for a lot of reasons you're going to need your money longer.”
Lifespan estimates can yield surprises
The Society of Actuaries and the American Academy of Actuaries recently relaunched a free online version illustrator of a long life.
The tool asks for basic information about an individual or couple: age, gender, retirement age, smoking status and a description of their general health: poor, average or excellent.
The results are intended to provide a “reasonable” estimate of how long you could live, the organizations said. The illustrations show the probability that someone will live to a certain age, as well as the number of years of life that someone can remain in retirement.
In general, the higher your current age, the more likely you are to live longer. Although life expectancy at birth may be 84 years, it will be even longer if you have already reached age 65, Schilling said.
The results could help people get a better sense of their options when planning how long they want to live on their money, she said.
For couples, there is another revelation that often comes as a surprise. “The chance that at least one of you will live to be 90 is even greater,” Schilling said.
Yet the financial sector's assumption of living to the age of 95 may be too generous, according to recent research by HealthView Services.
The expected life expectancy for someone who is 65 years old today and has no chronic conditions is 90 years for women and 88 years for men.
However, according to the study, only about 5% of people over 60 do not have chronic conditions.
Health status influences life expectancy projections
Chronic health problems such as high blood pressure, cardiovascular disease, cancer, diabetes, high cholesterol, smoking, obesity or Parkinson's disease shorten an individual's expected life expectancy.
For example, the study shows that a healthy 65-year-old man without chronic conditions has a 19.3% chance of living to 95 years or older. However, with high blood pressure the risk is 17.5%, with cardiovascular disease 15.8%, with high cholesterol 12.5%, with obesity 8.8% with a BMI of 35 to 39, with tobacco use 7 .4%, 2% for obesity with a BMI of 40 to 44 and only 0.4% for diabetes.
Those odds could make a huge difference in his retirement needs. According to HealthView Services, a healthy 65-year-old man might need about $1.1 million to maintain the 80% income replacement rate he’d need if he earned $100,000 in 2023. That assumes he lives to age 95, has a 6% annual portfolio return, receives Social Security benefits, and inflation is 3%.
However, if that 65-year-old man has a chronic condition, his life expectancy will be lower. And that could free up more of that retirement capital to spend in other ways, according to HealthView Services.
The study found that high blood pressure could shorten his life expectancy by nine years, to the age of 86. This would allow $447,469 to be spent on long-term care planning, emergency savings, money for heirs or other purposes.
According to the study, tobacco use could shorten his life expectancy by 13 years to 82, freeing up $616,245. Diabetes could shorten his lifespan by 16 years, leaving him with $727,947 to spend.
Most experts advise people to plan for how long they can outlive their possessions by: postponing your pension payment through the Social Insurance Bank or considering an annuity to increase your monthly income.
How Personalized Numbers Can Help
But considering an individual's specific health status and how it affects his or her life expectancy can help personalize financial plans, said Ron Mastrogiovanni, CEO of HealthView Services.
“During a planning process, people are more likely to take action when the numbers are personalized,” Mastrogiovanni said.
That doesn't necessarily mean eliminating age 95 assumptions altogether, he said.
But letting someone know what his or her personal life expectancy is can help give you a better idea of the age at which you can expect your child.
“That doesn't mean you pick that number” to plan for, Mastrogiovanni said.
“Whatever you like; you want to move in four or ten years, you can do that,” he said.
'But at least you're assuming an actuarial base number.'
