Would you change anything about how you live today if you knew when you were going to die? For most of us the answer would certainly be ‘yes’. But to what degree? That would likely depend on how many days, months or years you had remaining.
In our profession, life expectancy is one of those variables which makes building a plan as much of an art as it is a science; it is almost as unpredictable as the markets. If we knew when someone would pass it would make the plan that more accurate. For example, if a person spends $100,000 per year, has $300,000 saved for retirement, and will pass away in 3 years – there is a pretty good chance they can make it through the end of their life and not run out of money.
But how does this play out in the real world? A 60 year old person wants to retire at 62. They spend $128,000 per year on basic living expenses, health care costs $11,000 per year, has $800,000 saved across retirement and after tax accounts, receives $53,000 a year in pension benefits, Social Security of $27,000, and wants to travel as much as possible and help their children when it is needed.
Will they outlast her money? It depends.
When modeling a plan, oftentimes planners pick an age above the life expectancy of the average American (76.3 years for Men and 81.2 years for Women) and assume that’s how long someone will live. Say age 95. On the one hand you could argue it is prudent to plan far into the future to ensure the person doesn’t outlive their money. On the other hand, when we assume such a long life expectancy we need to consider what goals and dreams are being sacrificed now in order to ensure there is money remaining for the last 5 – 10 years of life. What if realistically, based on current health status, lifestyle choices and family history, the person will only make it to 87? Yet is ‘saving’ money to cover the remaining 8 years of life to 95, which in the example above would amount to approximately $1.73 million (in future dollars). Perhaps that money could be spent to fulfill a lifelong dream or help someone else.
To help determine a reasonable expectation for life expectancy you can complete a survey at www.livingto100.com. The process takes about 10 minutes and when finished you’ll have access to a report that not only details how long you will live but also provides insight into what behaviors and health issues are adding and subtracting years to your life.
While we can help our clients control certain aspects of what impacts their probability of long term financial success (spending, saving, timing around major life goals, how much to leave behind and the exposure to market volatility) death (and the stock market) we cannot. But what we can do is model reasonable expectations around life expectancy and make adjustments as time goes on based on your health status. Financial planning is as fluid as life and your plan should be adjusted accordingly.