Factoring Life Expectancy into Retirement Planning

Retirement planning horizons based on average life expectancy often result in underestimating the risk of running out of money, LIMRA contends.

The Census Bureau computes its average by measuring life expectancy from birth—currently placed at 78.5 years. When life expectancy is calculated from age 65, however, the results are quite different.

For example, the average life expectancy of a 65-year-old male is 83 years of age, for a female it is 86, and for either it is 90 years. However, LIMRA said, the right way to interpret this information in retirement income planning is to assume roughly half the males who are 65 years old today will live past age 83, and about half the females will live past age 86. For a couple, at least one of them will likely celebrate a 90th birthday and beyond. Nearly 25% of today’s 65-year-olds will live into their 90s.

Retirement planning is not about planning up to the average life expectancy, it is about planning beyond life expectancy.

Without an adviser’s guidance, it is easy for consumers to accept the national average statistic and make poor decisions based on it. A LIMRA survey found 59% of advisers expressed “major concern” about the impact outliving assets could have on their clients. Advisers need to educate clients and potential clients on the strong possibility they will live well into their 90s.

In the absence of guidance, even clients who have a sizable retirement savings account with a systematic withdrawal strategy can underestimate their longevity and exhaust their assets.