How long should you assume you’ll live in retirement?
4 August 2006I’ve written about the effect that rising life expectancy has on your retirement before, and today CNN Money has an article along similar lines: a person wrote in to them with a letter stating that he was “not going to plan on living beyond 85. That just seems iffy at best.”
Well, you don’t “plan” how long you’re going to live unless you’re Dr. Kervorkian. It just happens – you might plan to retire at 65 and die at 60. This is life, and bad stuff happens that is beyond your control. But think of it this way – would you avoid retirement planning entirely because of the risk that you might die at 60 and never retire? Would you drop out of high school, because you could get hit by a car and make all your effort worthless? Would you rack up $50,000 in credit cards, because hey, who knows what the future will bring?
Some people do – and most of them end up miserable. You have to plan assuming the “worst” case scenario – that you’ll live a lot longer than you expect, and that nothing random is going to jump in and kill you off to justify your financial irresponsibility.
Part of the problem with this specific attitude is that people don’t understand what “life expectancy” is. So here’s what you need to know:
1) It’s an average. Most people reading a site like this are going to fall well above the average. Why? Because you’re probably not living in extreme poverty if you’ve got an Internet connection and can understand the basics of finance. The averaging aspect of this can easily be misleading.
I’ll take an easy example of how the statistics can “lie” about an individual: a black male. Life expectancy for racial minorities is lower than whites in the U.S. – a black male will die on average at age 65-66, whereas a white male will die on average at 72-73. So if you’re a black male, you don’t have to plan for retirement, right? You’re dead anyway?
No. Obviously, skin color is not the reason they are dying early (not directly, anyway). The reason is extreme poverty among most blacks in America. I won’t get into the politics of it, we don’t care about that for this purpose – but it’s a fact that a large portion of black males are living in very bad conditions that whites don’t have to deal with. But if you’re a black male who lives in a nice neighborhood, doesn’t hear gunshots on the corner every night, and isn’t subject to any of those risks (gangs killing you at age 10, getting sent to prison, drugs, bad health care, on and on), the average black male lifespan doesn’t tell you much. You’re a lot more likely to live to 72-73 than 65.
The same principle works for people who don’t take risks in their lives to the extent that others do. Do you smoke? If so, your life expectancy will be lower than 73 if you’re a male. If you don’t, it will be higher.
2) It’s based on the people who are old right now – and may not be accurate for people who are younger. There’s a good related article called “So Big and Healthy Grandpa Wouldn’t Know You” from the New York Times about how older adults today are much, much more healthy than their grandparents. They’re bigger, 6 inches taller in most cases, and they die 20-30 years later. Why? Lots of reasons – but a big one is that when they’re younger, they’re living in healthier conditions. Many diseases don’t exist, we eat more, we are exposed to fewer risks – so 50 years later, we’re healthier.
What’s the point? Well, a big one is that if you can’t judge how long you’re going to live based on your grandparents, you also can’t judge it based on someone currently 15-25 years older than you – or more. The difference may not be as dramatic as with your grandparents, but someone born in 1950 had a much healthier childhood on average than someone born in 1930, and they’re likely to live longer.
3) Technology has a way of changing things. This matters especially for the young, but also for those who are in their 50′s and 60′s. Expect research in the medical field to get a lot better as you grow older. Think of the difference between medicine in 1976 and medicine today – 30 years makes some of the things doctors believed then look like they were primitive medicine men. And it’s only going to get more rapid – the Internet and other changes in the way we get information will guarantee that. More importantly, though, the Baby Boomers have a lot of money – and it will become more and more profitable to research ways to help old people live longer as they start to age.
So what should you do? For younger people, I recommend getting away from this idea that you should ever be drawing down on your retirement savings at all. If you’re in your twenties or thirties, it is not hard to save up a million dollars or more on an average salary. Starting early is the key. My personal goal is to have a retirement amount that makes sure I never have to touch the principal, and I can live entirely off the income it earns. It’s more ambitious than saving $500,000 and spending away my money as I age, but I think it’s a safer and better idea.
For older people, who are nearing retirement, I recommend trying to supplement your retirement with income and avoid drawing down as much as possible. It’s suprisingly easy in the age of the Internet to turn a hobby into a moneymaker. This won’t be enough to live off of – but it’s enough to keep you from having to spend your retirement money away.
For example, I was just shopping on E-bay for decorations for my new apartment, and came across a pop artist who spraypainted some very excellent stuff. (You can see it here). It looked like he’d made at least $30,000-$40,000 off of it in the last year or so from his profile. Most people take up new hobbies in retirement anyway – why not make something other people can enjoy, and you can sell?
Discuss this on the Free the Drones Forums here.
One Response to “How long should you assume you’ll live in retirement?”
August 12th, 2006 at 2:04 pm
[...] I’ve recently been discussing the problems that hit people’s financial planning when they don’t account for the fact that they might live well into their eighties. I asked how long you should assume you’ll live in retirement, as well as how technology might increase your life expectency, requiring you to save more. [...]