May 26, 2011

Expect to Live to 95

The life expectancy in the USA is 77.9 years according to CDC data from 2007.   It would seem logical to plan for a life that lasts about 78 years give or take.   If the average person lives to be 78 then it seems this is about how long you ought to figure you'll live.    However people who are 65 actually live longer on average.  This is generally because the older you get you've lived through the various potential risks of injury and illness that claim other lives earlier.   If you look at the CDC data for life expectancy at age 65 then you'll find that people who have lived that long tend to live another 18.6 years on average to the age of 83.6.

When you are planning retirement that basically starts at age 65. Retirement assumes you'll live to retirement age.  Once you've made it that far, you should figure your retirement planning based on the life expectancy for someone at age 65 because that is how old you'll be.    For this reason if you're figuring your retirement you should plan on living well into your 80's.   Given that the average life expectancy is exceeded by a good percentage of people it makes even better sense to plan for a longer life than average in order to give yourself some margin.  

Because life expectancy at age 65 is in the mid 80's and because many people live longer than average, I think it makes good sense to plan to live to age 90 when you're figuring your retirement planning.

Married couples should plan for one spouse to live longer.   According to this article form Wachovia : "While a 60-year old man today has a 20 percent probability of reaching 95 and a 60-year-old woman a 30 percent chance, there is a 40 percent chance that at least one member of a married couple at the same age will live until 95."

That means that there is a pretty good chance that you'll need your retirement money to last 30 or more years if you're a married couple that plans to retire at age 65.

Of course averages are just averages.   You may live longer or not.   To be safe though you really do need to plan for a longer lifetime.  If you made the mistake of thinking that average life expectancy of 77 means you only need 12 years worth of money at age 65 then you could drastically short change your retirement savings.   To ensure a more financially secure retirement you really need to plan as if you expect to live to age 95 or longer.

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