Dealing with our mortality isn’t a pleasant topic. Nonetheless, as a Certified Financial Planner in Greenville, SC, it’s a vital part of any conversation we can have about retirement.
By taking our best guess at how long we’ll live, we have some basis for calculating how much we’ll need for a comfortable retirement without outliving our money. Conversely, by knowing how much we’ll need, we can make plans to adjust our annual expenses so that we live within our means for the rest of our lives.
At the outset, it’s important to clarify two terms:
- Life expectancy: How long someone of your gender, age and health is anticipated to live on average.
- Longevity: How long you, as an individual, should expect to live.
The Social Security Administration (SSA) offers a rudimentary life expectancy calculator, but it has only two inputs: Gender and birthdate. The output is the national average, based on actuarial statistics. It is not a predictor of longevity, which should account for things like your health, family history, lifestyle and other factors. Surely, we can do better if we consider more factors.
How Is Longevity Incorporated into Your Plan
Two critical data points in your retirement planning are your retirement date and how long you’ll live after retirement. You have some say in determining the first number, but obviously, events can overtake any plan. By incorporating your personal longevity into your retirement plan, you’ll have some idea of how much money you’ll need to live the kind of retirement you’d like.
While the common concern is not living to the age you hope, another risk many people don’t consider is living past that age, and therefore, running out of money. The question becomes, how do you balance the risk of overstating your expected lifetime (which can suggest the requirement to accumulate a much bigger nest-egg than possibly needed, something that may be impossible to achieve) with the possibility you may not live as long as you planned (which can result in postponing your retirement to save additional money and ultimately, shortening the period when you draw upon a fixed income and savings).
At Global View, longevity is built into our clients’ retirement plans by discussing their complete and overall picture. This process allows us to establish a realistic idea of how much money is needed at retirement to finance each client post-retirement years. No two situations are the same.
Factors to Consider for an Appropriate Lifespan Projection
The SSA is not amiss: Your gender and birthdate are the fundamental factors required to calculate life expectancy. But your task is to develop an estimate of your personal longevity because, after all, what really matters is your own circumstances, and not the national average.
Therefore, it’s helpful to incorporate the following factors into your lifespan projection:
- Health: This has an obvious and significant role in estimating your longevity. Chronic conditions, health history, genetic disorders, smoking habits and many other data points are necessary to evaluate your overall health and how it will affect your longevity. However, keep in mind that while the precision of the input data may be on-point, the output characterization of your general health is blunt, with labels like excellent, average and poor. These labels refer to your state of health versus that of other people of the same age and status.
- Family history: It’s important to look at how long your relatives lived and what they eventually passed away from. Knowing this can underscore any genetic risks to your health that may impact your longevity.
- Lifestyle: It’s also important to incorporate lifestyle factors that can affect your longevity. These include your habits for work and play; your personality; how much you sleep and exercise; your weight and eating habits; how much you smoke and drink alcohol; risky behavior (like skydiving, etc.); and many other factors. It also encompasses dealing with where you live in terms of environmental toxins, access to healthcare, income and more. Retirement planning in the Carolinas is different than in other areas.
Consider Both Best-Case and Worst-Case Scenarios
It makes sense to consider the best- and worst-case scenarios when estimating your longevity. The average of the two is perhaps your best guess at how long you’ll live.
In the best-case scenario, you live well beyond your life expectancy and will require the biggest retirement nest egg. The reverse is true for the worst-case. By performing both scenarios, you’ll understand how to plan for what you might need at retirement. At Global View, our Certified Financial Planners in Greenville, SC can help you with this.
If you are married, you will also want to work out scenarios in which you’re on your own and understand how your death will impact your spouse. The Coronavirus pandemic was a stark reminder that life doesn’t always go as planned. Use this new guide as a conversation starter: Financial Planning Post-COVID-19.
When planning for the future, make sure to incorporate information from your insurance policies, trust funds, retirement accounts and Social Security when calculating the resources and spending needs of each spouse.
Review and Update Your Plans Regularly
Your retirement plan can change in significant ways that make regular reviews essential to success. Your review should incorporate changes to your income, spending, savings, health, marital status, lifestyle, income and other important factors.
A prudent way to keep your retirement plans up-to-date is to schedule regular meetings with your financial advisor. Together, you can review changes that affect your longevity and your finances, and then adjust the plan accordingly. A financial advisor can help keep you informed about changes to regulations that affect your plan assumptions, as well as bring new alternatives to your attention while acting as a sounding board for your assumptions.
Why Longevity Is an Important Consideration for Social Security
Social Security benefits are a lifetime annuity. Within bounds (i.e., ages 62 to 70), you determine when this annuity begins. The longer you wait to claim your benefits, the more you’ll receive each month. Of course, by waiting to claim benefits, you’ll receive fewer years of benefits, although survivor benefits will increase by postponing your claim. (For more on how your Social Security benefits work, read our recent blog post: Retirement Planning in the Carolinas: 5 Myths About Social Security.)
If you think you will have below-average longevity, the sooner you’ll be tempted to claim benefits. The opposite is true if you predict an above-average longevity. Review your Social Security projections and discuss different situations with your financial advisor. At Global View, both myself and team member Amanda Baize recently achieved the designation of Registered Social Security Analyst with the National Association of Registered Social Security Analysts. Making the wrong decision on how and when to take Social Security benefits can cost a person thousands of dollars. At Global View, we can run analysis so you understand the value of your monthly Social Security benefits based on different starting ages for a given longevity and expected average of cost-of-living increases.
Remember, the decision you make about your Social Security benefits is permanent!
Schedule a no-obligation conversation with the Certified Financial Planners at Global View, so you can plan for the best, prepare for the worst, and understand what average-case scenarios mean to you.