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Managing Risk of Longevity

September 30, 2018

A long, healthy life is a blessing. The good news: Americans are living longer than ever before. Life expectancy has increased dramatically in the last few decades as a result of major advances in science, technology and medicine. An individual’s life expectancy is his or her median life span.

In the United States, the life expectancy of a 65-year-old male non-smoker is 20 years. This means that 50 percent of men are expected to live beyond age 85, and 50 percent are expected to die before 85. A 65-year-old non-smoking woman, on average, is expected to live until age 88. When combined with the life expectancy of a spouse, the odds are 50 percent that at least one spouse will live to age 92 and 20 percent of living to 98.

Even better news: Life-expectancy statistics reflect averages for the entire U.S. population, including those with serious medical conditions, poor lifestyle habits and limited access to quality medical care.

I suspect that few readers of this article would be representative of the overall population. In other words, most of us can expect to enjoy a life span somewhat greater than the statistics indicate.

Because a particular individual’s life span is unknown, smart retirement and investment decisions require each of us to make reasonable assumptions about our expected life spans. Economists use the term “longevity risk” to refer to the possibility that a person will live a longer or shorter life than expected. Because there are lifestyle costs associated with either overestimating or underestimating a person’s life span, it’s important to consider the implications of being wrong.

In this case, planning overly conservatively (that is, for a longer life) can result in an unnecessarily frugal lifestyle and squandering an opportunity to enjoy the money while your health is good. On the other hand, planning for a lifetime that is too short can mean overspending and depleting your savings prematurely, resulting in a reduced standard of living or dependence on family or friends. The latter error would strike most families as carrying greater risk.

In light of that, while it can make sense to use a shorter life expectancy in certain situations where an individual’s health is clearly failing, in most cases the more prudent approach is to assume a planning horizon through age 95 or 100.

However, this longer life requires us to prepare physically, intellectually and financially to avoid living a decade or more impaired and impoverished. More money is needed to sustain a longer life span, and this changes the calculus of Americans’ retirement decisions.

Unfortunately, there is little evidence that this is happening. According to a recent survey conducted by the Society of Actuaries, pre-retirees and retirees underestimate the probability that they or their spouse will live into their 80s, 90s or longer. There are obvious risks for those who fail to appreciate and adapt to this new reality.

In my next article, I’ll talk about those risks.

This article is for general information purposes only and is not intended to provide specific advice on individual financial, tax, or legal matters. Please consult the appropriate professional concerning your specific situation before making any decisions.

John Spoto is the founder of Sentry Financial Planning in Andover and Danvers. For more information, call 978-475-2533 or visit www.sentryfinancialplanning.com .

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