How long are you going to live? That’s an impossible question to answer. But when you are planning for your financial future, it’s a very important question that needs an answer. Well, maybe not an answer, but as least a good guess. One of the main reasons for putting together a financial plan is to make sure you don’t run out of money before you run out of breath. But trying to figure out when that’s going to happen is at best a guess.
When putting a financial plan together, we need to make a lot of assumptions. We make assumptions about our lifestyle, the financial markets, inflation, tax laws, and many other things. This is why financial planning is not an exact science. Markets will change, tax laws will change, inflation rates will change, and our life and goals will change.
Our life expectancy is another assumption we have to make in a plan. I’ve often said that planning would be easy if we knew when our life was going to end. We could plan our finances perfectly. We would know that we have enough money to comfortably live out our days, and feel free to spend money on things we enjoy without worrying about leaving behind a big pile of money once we are gone. We could achieve what I consider to be the “perfect” retirement plan, the one where the check to pay the funeral expenses bounces.
So, when working on our financial plan, how do we address our life expectancy? First, we can start with statistics. According to the Social Security Administration, a man reaching age 65 today can expect to live, on average, until age 84.3. A woman turning age 65 today can expect to live, on average, until age 86.6. That’s a good starting point.
Then we need to consider our current health. Do we exercise regularly? How about smoking? How’s our weight and eating habits? We should also consider the depth of our gene pool. I always ask clients about their parents. How old are they, or if they have passed away, how long did they live? If mom and dad lived into their late 80s or 90s, we want to make sure to use a higher-than-average expectancy in our plan.
There are tools available that can help. One of my favorites is the website www.LivingTo100.com. It is a site developed by Dr. Thomas Perls, founder and director of the New England Centenarian Study, the largest study of centenarians in the world. There is a calculator on the site that can help you estimate your life expectancy. There are 40 questions related to your health and family history. It only takes about 10 minutes to complete, and it will give you a guesstimate of your life expectancy. Having done it myself, I admit that it’s a little disconcerting as you wait to see your “number.” But it’s good information.
Once you have a number, it’s important to add a few more years to the estimate just in case. You don’t want to plan as if your life expectancy is 90 and then run out of money when you live until age 95. Also, with advances in medicine and medical technology, our life expectancies are likely to increase. I recently attended a conference on retirement income planning, and one speaker said that we should be planning as if our clients will live to 110 or 120 years of age!
Just like the other assumptions we build into a plan, our life expectancy estimate isn’t a set-it-and-forget-it number. As we age, we will want to adjust most of the assumptions built into the plan as we have new information. If we suffer a decline in health, we might want to adjust our life expectancy assumption downward. If we hit 80-plus and are still going strong, we might want to increase it.
Financial planning is not a static process. It’s not something we do once and then leave alone. It should be revisited at least annually and updated as life changes. Because it certainly will.