Moving Beyond Average Life Expectancies
If you've retired in your 60s, you can reasonably expect to enjoy another 20-30 years in retirement. The challenge now is to make sure your assets last long enough to span your lifetime.
One of the most challenging aspects of retirement income planning is making a reasonable estimate of life expectancy. Investors building their retirement plans around average life spans may risk outliving their nest egg, while investors who are less conservative with their life expectancy and hope to live well past the average may fare better in the long run.
If an investor's nest egg is large enough, or if their income needs are small, life expectancy may never enter into the equation — investment income alone may be sufficient to meet expenses, and the investor may be able to rely on income year after year without ever tapping investment principal. Of course, such cases are all too rare.
More commonly, investors will need to draw down their principal gradually in order to meet income needs while safeguarding their income stream. The key in achieving this balance may be a less conservative estimate of life expectancy.
When the Average Isn't Aggressive Enough
The average life expectancies for those at age 65 are well established. Men live an average of just over 17 years after their 65th birthday, while women live an additional three years on average more than men.1 Based on these statistics, a 65-year-old woman with a $500,000 nest egg might conclude that, if her investments grew 6% per year, she could withdraw $44,000 per year and still have a small amount left for her heirs upon her death at age 85.
There are several flaws in this line of reasoning, but perhaps the most egregious is the assumption that the investor will have an exactly average life expectancy. In reality, the typical 65-year-old has a 50-50 chance of living longer — in some cases, far longer — than the average. This means that retirees building an income plan based on the average may draw on their investments too aggressively. The investor in the example above, for instance, may find herself in serious financial straits if she lived to age 85 or beyond, something which is quite probable.
A careful examination of life expectancy figures reveals that the average retiree has a fair chance of living well beyond the average, a fact that should influence any retirement income plan.
It's best to talk with your financial advisor about your individual situation. If you don't already have one, call us at 1-800-896-2645 for assistance.