The Age-Old Question
By Lori Booth-Houle, CPA, CFP®
“Age is not a particularly interesting subject. Anyone can get old. All you have to do is live long enough.” – Groucho Marx
How much time do we each have to live? As planners, the reaction we get from clients if we do a retirement cash flow analysis and project out to the client’s age 95 is generally giggling, disbelief, or actual horror. At times like that, a crystal ball would be handier than a pocket on a shirt.
But of course for most of us, “How long will you live?” is an unanswerable question, which is probably as it should be, although it leads directly to another important (and also mostly unanswerable) question: How long will your retirement last? For obvious reasons, this is a critical variable when it comes to retirement planning. If we’re working with a client who is 65 and apply a rule-of-thumb 30-year retirement horizon, we may be overestimating their life span, which could result in the client needlessly underspending during their remaining life. However, if we are not conservative enough and assume the client’s life span is shorter than it actually is, the client may be encouraged to overspend because, hey—it’s time to carpe diem!—and as a result their wealth could be depleted while they are alive (a definite “fail” in retirement planning).
It’s a conundrum, but no worries…it’s actuaries to the rescue! We can fall back on actuarially-based mortality statistics and obtain a more nuanced perspective of our life spans from longevity averages (even though we each secretly think that we’re like the residents of Garrison Keillor’s Lake Wobegon, “where all the women are strong, all the men are good-looking, and all the children are above average”).
The probability geeks at the American Academy of Actuaries and the Society of Actuaries have created a consumer tool called the Longevity Illustrator which, with just a few basic pieces of information, can provide an estimate of how long you, and a spouse/partner if applicable, might live. I took the plunge and entered the information for myself and my husband, Craig.
Craig is five years older than me, possesses a sunny, low-stress outlook on life, has annoyingly few bad health habits (that container of ice cream in the freezer might be the one glaring exception but even there, he indulges in moderation), and even on his worst day, he is always fitter and faster than I am when we mountain bike and hike together. Additionally, his family history leans toward longevity—his Mom is a healthy 85 while her sister, Aunt Phyllis, is a robust 93. Believe me—you don’t want to get into a competitive game of “Cards Against Humanity” with these two firecrackers, because they’ll hang you out to dry.
So given all of this, it was interesting to see that according to the Longevity Illustrator, Craig has only a 42% chance of living to age 90, while I have a 55% chance (being a woman is a plus when it comes to longevity). Takeaway: No more buying green bananas for Craig!
The Longevity Illustrator then displayed a Planning Horizon chart for us in two different formats, both of which showed our longevity as individuals and as a couple, according to various given probabilities. This information has key implications in the retirement planning world. Knowing how long we’re likely to live as a couple, who is likely to live on as a surviving spouse (sorry Craig, that would be me), and how those scenarios affect lifestyle and spending, can help us plan more effectively for those later years.
So, how might you use this tool from our actuary friends to enhance your own retirement planning? It’s definitely a little uncomfortable to think about all of this, but if you make it part of the rest of your thought process around retirement, which can be really fun, it will be more palatable. Run the Longevity Illustrator for your own scenario, give some thought to the implications of what it’s telling you, then bring the results for discussion next time you visit with your advisor. And regardless of the results, remember—these are just averages. But it may be the next best thing to a crystal ball. And who knows, it might cause you to adopt even heathier lifestyle habits, like walking the dog three miles a day (Craig does that) and banishing the ice cream habit (Craig has not done that).
In our case, there is a 60% chance that Craig and I will both live another 22.5 years together. While that’s not terribly comforting, I’m sticking to the Lake Wobegon theory that we’re outliers…in other words, above average. And as George Burns once said, “If you live to be one hundred, you’ve got it made. Very few people die past that age.”