Volume 37, Issue 3, March 2002
Will Your Savings Take You to Age 90 and Beyond?
by Clark Mangan
Youíve undoubtedly seen the headlines. Tantalizing hints from laboratory research suggests that medical science may soon break the age barrier of 120 years, and gene manipulation will allow people to live to 140 or even 150 years. Much of this speculation is based on work with fruit flies, and such breakthroughs, if they occur, are probably years away. Nonetheless, the headlines accurately reflect one reality: people are living much longer and that is having a significant impact on retirement planning. Letís look more closely at the reality behind these headlines and what impact it might have on your retirement plans.
Looking Beyond Life Expectancy
First, to understand the potential impact you need to understand some basics about life expectancy. Life expectancy of Americans increased nearly 30 years during the 20th century. According to federal statistics, the life expectancy of a male born today is approximately 73 years, and the life expectancy of a female is 79 years, but thatís a misleading statistic for retirees. Those figures reflect all deaths at all ages. If you survive to retirement age, your overall life expectancy becomes longer. A man who reached age 65 in 1995 could expect to live another 15.6 yearsónearly age 81! A woman who reached age 65 could expect to live at least another 18.9 yearsónearly age 84! This is sometimes called longevity: how long we are expected to live assuming we reach a milestone age, such as 65. Every milestone we reach increases our overall life expectancy. Furthermore, these rates of longevity are increasing. In the first 50 years of the 20th century, the longevity for people reaching age 65 increased 1.3 years for men and 2.8 years for women. From 1950 to 1995, however, longevity for men increased 2.7 years and for women it increased 4.2 years.
But even these longevity figures are misleading, because they are only averages. Half of the people reaching a particular milestone age will live beyond that age. That is, if you are a male who lives to age 65, you have an even chance of living beyond the life expectancy of age 81. We know that Americans usually now live well into their 80s. Living into their 90s is far from rare, and Willard Scott never has trouble finding people celebrating their 100th birthdays. Federal statistics say that one-third of the men reach age 65, and nearly half of the women will reach age 85. With married couples, itís even more likely that one of you will live beyond life expectancy.
Planning for Longer Life
What does this mean for your retirement plans? Letís say you project that you will draw money from your nest-egg accounts, such as a 401(k) and individual retirement accounts, at a pace that depletes the nest egg roughly by the end of your life expectancy. Yet as the statistics show, you have a 50-50 chance of living beyond that average life expectancy. If that happens, you will have outlived your nest egg, and the only income you will have from then on would be Social Security payments and perhaps payments from annuities or a defined benefit plan, which will continue for the extra years you live.
Running out of retirement savings is a gamble most people donít want to take. Planning professionals commonly project clients living to age 90 or 95, and for some people, even that isnít long enough. So while you may not live to 120 or beyond, the odds are increasing that you are going to live a longer time than you might once have thought.
What does this mean for retirement planning? What if you are one of those individuals who celebrates your 100th birthday with Willard Scott? There is no easy answer here. Long retirements suggest that people may need to be more cautious in their spending in their early years of retirement in order to stretch their resources out further. For others, it may mean being more aggressive in their retirement investing. Working full- or part-time beyond the traditional retirement age may become necessary. It will be increasingly important to protect against the high expense of late-life health problems by buying long-term care insurance. But most of all, many of us will need to re-adjust our thinking, and consider the possibility of 100-year lives and what that means for our retirement.
Clark Mangan is a financial advisor with the Mangan, Ernst & Rankin Wealth Management Group of First Union Securities in Marlton, N.J. His column appears bi-monthly.
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