You can’t do retirement income planning without considering life expectancy. Many individuals use this statistical measure as the primary factor for deciding when they will begin taking their Social Security benefits as well as for determining the duration of their retirement plan.
Life Expectancies are Averages
What many people either fail to realize or downplay is the fact that life expectancies are statistical averages based on the probability of dying at various ages. To illustrate this, let’s look at the 2014 Period Life Table that can be found on Social Security’s website. The table lists death probabilities and life expectancies for males and females at various ages ranging from 0 to 119.
Per the table, the life expectancy for a 66-year-old is 17.12 for males and 19.63 for females. This translates to an average end-of-life age 83 for males and 86 for females. In other words, 50% of males who reach age 66 are projected to die before age 83 and 50% are projected to die after 83. The same probabilities apply to females, with 50% projected to die before age 86 and 50% after 86.
Assuming that you’re a 66-year-old male in good health, why would you plan on living only 17 more years? Do you want to live out your remaining days believing that 80% of your life is behind you and you only have another 20% to go? That’s what you’re doing when you use life expectancy.
When Are We Dying?
To better understand when people are dying, I analyzed Table 3 of the Centers for Disease Control and Prevention National Center for Health Statistics National Vital Statistics Reports for 2014, the most recent year for which the report was published. The following is an excerpt from the table showing the number of males and females in various age brackets beginning at 65 – 69 who died in 2014.
|65 – 69||129,802||14.5%||93,032||9.0%||222,834||11.6%|
|70 – 74||138,846||15.5%||109,861||10.7%||248,707||12.9%|
|75 – 79||149,259||16.7%||132,813||12.9%||282,072||14.7%|
|80 – 84||167,171||18.7%||175,261||17.0%||342,432||17.8%|
|85 and over||308,785||34.5%||517,441||50.3%||826,226||43.0%|
|Total Deaths for All Ages||1,328,241||1,298,177||2,626,418|
|Ages 65+ as a % of Total||67.3%||79.2%||73.2%|
Per the table, 1.9 million, or 73.2% of the 2.6 million individuals who died in 2014 were 65 or older. 60.8% of this group died when they were 80 or older, with 43% dying after age 84. 1.0 million, or 79.2% of the 1.3 million females who died in 2014 were 65 or older. 67.3% of the female group died when they were 80 or older, with 50.3% dying after age 84. Males weren’t quite as fortunate. 900,000, or 67.3% of them died when they were 65 or older. 53.2% made it to 80 or older, with 34.5% surviving to 85 and over.
Planning Implications of Using Life Expectancy
The primary planning implication of using life expectancy as the basis for all of your retirement planning decisions is that there’s a 50% chance that you’re projected to outlive your assets. A recent New York Times article featured a 90-year-old woman, Alice Jacobs, who was once well off, owning a factory and horses.
As a result of years of living in an assisted living center, Alice depleted her savings and is now dependent on Medicaid to pay for her care at a county-owned nursing home in Virginia. Alice’s quote says it all, “You think you’ve got enough money to last all your life, and here I am.”
Unfortunately, Alice’s situation isn’t isolated. As the article points out, Medicaid pays for most of the 1.4 million people in nursing homes, covering 20 percent of all Americans and 40 percent of poor adults.
Given the reality of outliving one’s assets, longevity protection strategies should be considered for inclusion in every retirement income plan. Pre-retirees and retirees alike whose plans include predictable lifetime income are more confident about their ability to retire and remain retired than those who don’t.
What about Genetics?
What role does genetics play in determining how long you will live? Aren’t you destined to get the diseases that run in your family? More and more research is showing that genetic determinism, which many scientific thinkers espoused in the 19th and early 20th century, is limited in predicting and preventing disease.
A relatively new field, epigenetics, is demonstrating that environment, not genetics, is the primary factor in controlling human health and disease. In his article, “Why Your Genes Aren’t Your Destiny,” Chris Kresser makes the point that while genes have a powerful influence on our susceptibility to disease, “in most cases, genetic predispositions will only manifest in the presence of certain environmental factors.”
Epigenetics has demonstrated that genes don’t control themselves. In his article, “Why Your DNA Isn’t Your Destiny,” Dr. Mercola states that we change our genetics from the foods we eat, the air we breathe, and even the thoughts we think. According to Dr. Mercola, epigentics helps explain why one identical twin develops cancer and the other remains healthy and why one becomes obese and the other remains lean.
Plan for a Long Life
Life expectancy, which is nothing more than a statistical average based on the probability of dying at a particular age, can be used as a starting point when doing retirement planning. Given the fact, however, that a high percentage of individuals who live to 65 survive to 80 and over, it behooves you to plan for a long life assuming that you’re in good health or you have the ability to take control of, and are motivated to improve, your health.
Being optimistic about, and planning for, a long life is good for your physical, mental, and financial health. When it comes to life expectancy, err on the optimistic side.
Robert Klein, CPA, PFS, CFP®, RICP®, CLTC® is the founder and president of Retirement Income Center in Newport Beach, California. Bob is also the sole proprietor of Robert Klein, CPA. Bob applies his unique background, experience, expertise, and specialization in tax-sensitive retirement income planning strategies to optimize the longevity of his clients’ after-tax retirement income and assets. He does this as an independent financial advisor using customized holistic planning solutions based on each client’s needs and personality.