Most people give minimal thought to one of the most important issues in their retirement plans.
The result can be a wildly inaccurate plan.
A goal of every retirement plan is to ensure your income and cash flow last at least the rest of your life.
To meet that goal, you need a reasonable estimate of your life expectancy.
But in most plans, the life expectancy estimate essentially is plucked out of the air.
People generally underestimate life expectancy, according to surveys.
Americans believe the life expectancy for their age group to be much less than it really is.
Better estimates are used when professionals help prepare a plan. Even then, however, life expectancy is little more than a rough estimate or guess, or to be on the safe side the planner assumes a very long life.
When life expectancy is underestimated, there’s a real risk of running out of money in retirement — and doing so many years before retirement ends.
On the other hand, overestimating life expectancy means retirees save too much and have lower standards of living than they could afford. That’s great for their heirs and charities, but the retirees needlessly deprive themselves.
An overestimate of life expectancy also might lead one to use higher-risk investment strategies to try to fund all those expected years of retirement.
In a good plan, the life expectancy estimate influences estate planning, the choice of Medicare plans, whether or not to buy an annuity, long-term care planning, annual spending, investment strategies, and more. That’s why the decision requires more attention and effort than most give it.
It’s easy to find an average life expectancy for your age group.
You can use the life expectancy tables the IRS prescribes for required minimum distributions for IRAs and other retirement plans. You can turn to Social Security’s estimates on its website.
Of course, web search engines generate a number of sources after searching for “life expectancy,” “life expectancy estimates” and similar terms.
Those sources, however, provide only an average or median life expectancy for your age group. Half the age group will live longer than the life expectancy and half will die earlier.
Some of the estimates have a further breakdown. For example, there might be an estimate that on average women who are age 65 today are expected to live to age 90 or beyond. The web site of the Centers for Disease Control and Prevention (CDC) is one that has such estimates.
While helpful and better than guesses, these sources do little to help estimate your personal life expectancy.
They tell what the averages and probabilities are for your age group.
More refined estimates can be made using various free calculators available on the web.
They usually ask a series of questions about your health and lifestyle. Some ask only a few basic questions while others ask details about lifestyle and data from recent medical tests.
A popular calculator is at www.livingto100.com. Social Security has a life expectancy calculator on its website, and many life insurance companies also do.
The Wharton School at the University of Pennsylvania has a calculator that received good reviews. You can access several well-regarded calculators in one place at www.lifeexpectancycalculators.com.
While better than life expectancy tables and averages, the calculators also have many shortcomings.
Some of the calculators aren’t updated often enough to reflect the latest research and findings.
Many, in a quest to be user-friendly, limit the questions they ask, leaving out important issues.
Most, for example, don’t ask if a person ever had cancer.
Some of the calculators make arbitrary decisions.
For example, research shows that calcium-rich diets improve bone density and reduce hip fractures late in life. But the research doesn’t show how much a calcium-rich diet and avoiding hip fractures increase life expectancy.
Yet, at least one calculator asks about calcium in the diet and arbitrarily adjusts life expectancy based on the answer.
The calculators also rely on self-reported information, which can be incomplete or inaccurate.
Perhaps most important, the online calculators treat each factor in isolation. In the real world, factors often interact. Two or more factors can increase or decrease life expectancy more together than each factor alone.
In the past, I’ve advised readers to use the online calculators but use more than one.
You’ll see different results, sometimes with differences of a decade or more.
Then, you decide if you want to be conservative and use the longest projection, average the results, or use another method.
More recently, technology is available that prepares a more personal, detailed, scientific and customized estimate at an affordable price. Insurers and life settlement firms have used customized life expectancy analyses for years.
Though details vary, the firms offering these services have accumulated data from millions of individual records, often from insurance companies and the Social Security Administration.
They developed models to analyze blood tests and other data and provide an estimated life expectancy for an individual.
A distinguishing feature of these models is they consider more factors than other methods.
Also, factors are considered in combination with each other instead of in isolation.
Using the models on the factors of people who have passed away reveals that evaluating multiple factors together can identify early markers of disease or lower life expectancy though individual data points are in normal ranges.
The reverse also is true. A person who is unhealthy by a few measures might be generally healthy and have an above-average life expectancy when all factors are considered.
I’m familiar with one such service, myLQAnalysis from LongevityQuest (LQ).
The important point is that life expectancy is a key factor in developing a reasonably accurate retirement plan. You should give it more time and attention than most people do.
