Have you given much thought to how long you will live? In a recent survey, more than eight out of 10 workers were unable to give a personal life expectancy that is close to the actual life expectancy for their age. Only about one-third expected to live longer than the average life expectancy, according to a 2004 Society of Actuaries study.
Estimating your own life expectancy is one area where it’s probably better to overshoot. Planning financially to live a long life may help you avoid a retirement income shortfall, regardless of how long you actually live.
Steps to a longer life expectancyThere are two explanations why people under-estimate how long they will live. First, life expectancies have grown significantly over the past several decades. In 1941, a 45-year-old male could expect to live to age 70. In 2002, life expectancy for a 45-year-old male increased to 78, based on figures from the 1941 Standard Ordinary Mortality Table, National Association of Insurance Commissioners.
Second, life expectancy grows longer with age. A 70-year-old male in 2002 had a life expectancy of 83, five years longer than a 45-year-old. The National Center for Health Statistics estimated in 2003 that an 80-year-old male in 2002 had a life expectancy of 88, more than 10 years longer than his 45-year-old counterpart
Don’t risk a cost overrunIf you underestimate how long you might live when planning for retirement, you run the risk of outliving your assets. By including a realistic expectation of life in your overall retirement plan, you can determine how much you should be setting aside now.
Remember that medical bills, long-term-care costs, and other expenses commonly associated with the onset of age can strain even a robust portfolio. In fact, you may want to base your retirement planning on the assumption that you will live five years longer than your estimated life expectancy to provide a financial cushion.
Time until retirement
When retirement is many years away, you can afford to take greater risks with your 401(k) account. You may want to invest the bulk of your money in stock HYPERLINK “javascript:openDictionaryTerm(‘mutualfund’)”mutual funds or in stocks themselves if your plan has aHYPERLINK “javascript:openDictionaryTerm(‘brokeragewindow’)” brokerage window. If an investment doesn’t perform as well as you expect for a period — because the manager’s investment style is out of favor or stocks are in a slump — you’ll have time to recoup the loss.
On the other hand, if you’re planning to retire fairly soon, you may want to gradually shift a portion of your assets into less volatile investments to preserve capital, or hold on to what you’ve got. Remember, though, that it’s important to keep at least a portion of your assets focused on growth even after you retire.
It’s not much fun trying to calculate how many years you might have left. But underestimating your life expectancy could be a mistake that has far-reaching consequences.