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How Long Will Your Money Last?Posted by Randy on: 2005-11-08 09:21:47 in category:
Retirement Headlines [ Print | Permalink / 0 Comment(s) ] A couple of weeks age I attended a Financial Planning industry conference. One of our presenters made a comment that shocked most of the audience. He asked the crowd if any of us had a young daughter of granddaughter, a few hands when up. Then he asked us to guess what her life expectancy was estimated to be. The crowd tossed out a few numbers, 85â?¦90. We were all surprised to here the lifespan of a young female could be as high as 100! Youâ??ve undoubtedly seen the headlines. Promising work from laboratory research suggests that medical science may soon break the â??age barrierâ?? of 120 years, and gene manipulation will allow people to live to 140 or even 150 years. Much of this speculation is based on work with fruit flies, and such breakthroughs, if they occur, are probably years away. Nonetheless, the headlines accurately reflect one reality: people are living longer, much longer, and that is having a significant impact on planning for retirement. Living longer can be both a blessing and a curse. As long as our quality of life is satisfactory and health is reasonable good, living a long life sounds appealing. However, longevity has some financial pitfalls, namely â??running out of money!â?? Letâ??s look closer at the reality behind these headlines and what impact it might have on your retirement and income plans. First, to understand the potential impact you need to understand some basics about life expectancy. Life expectancy of Americans increased nearly 30 years during the 20th century. The average life expectancy of a male born today is approximately 73 years, and the life expectancy of a female is 79 years, according to federal statistics. But thatâ??s a misleading statistic for retirees. Those figures reflect all deaths at all ages. If you survive to retirement age, your overall life expectancy becomes longer. A man reaching age 65 in 2005 can expect to live another 20 yearsâ??nearly age 85! A woman reaching age 65 can expect to live at least another 23 years â??nearly age 88! This is sometimes called longevity: how long we are expected to live assuming we reach a milestone ageâ??such as 65. Every milestone we reach increases our overall life expectancy. Furthermore, these rates of longevity are increasing. In the first 50 years of the 20th century, the longevity for people reaching age 65 increased 1.3 years for men and 2.8 years for women. >From 1950 to 1995, however, longevity for men increased 2.7 years and for women it increased 4.2 years. But even these longevity figures are misleading, because they are only averages. Half of the people reaching a particular milestone age will live beyond that age. That is, if you are a male who lives to age 65, you have solid chance of living beyond the life expectancy of age 85. We know that Americans now routinely live well into there 80s. Living into there 90s is far from rare, and Willard Scott never has trouble finding people celebrating their 100th birthday. Federal statistics say that one-quarter of the men and women reaching age 65, will live to 92 and 94 respectively. And with married couples, itâ??s even more likely that one of you will live beyond life expectancy. What does this mean for your retirement income? Letâ??s say you project that you will draw money from your retirement accounts, such as a 401(k) and IRAs, at a pace that depletes the account roughly by the end of your life expectancy. Yet as the statistics show, you have a 50-50 chance of living beyond that average life expectancy. If that happens, you will have outlived your income, and the only income you will have from then on would be Social Security and perhaps payments from pensions. Running out of retirement savings is a gamble most people donâ??t want to take. Financial advisors commonly project clients living to age 90 or 95. And for some people, even that isnâ??t long enough. So while you may not live to 120 or beyond, the odds are increasing that you are going to live a longer time than you might once have thought. What does this mean for retirement income planning? What if you are one of those who celebrate your 100th with Willard Scott? There is no easy answer here. Long retirements suggest that people may need to be more cautious in their spending in their early years of retirement in order to stretch their resources out further. For others, it may mean being a bit more aggressive in their retirement investing. Working full or part time beyond the traditional retirement age may become necessary. It will be increasingly important to protect against the high expense of late-life health problems by buying long-term care insurance. But most of all, many of us will need to readjust our thinking, and consider the possibility of 100-year lives and what that means for our retirement. As Iâ??ve written in this column many times, one should prepare for retirement with conservative income paying investment (bonds or annuities) in order to cover fixed expenses. Also allow for some retirement account growth to counter future inflation youâ??ll undoubtedly have during your long, happy retirement. And alwaysâ?¦make sure youâ??re properly insured against the income robbing health care events that are inevitable. Andy Barkate is the President of California Retirement Plans, LLC a local investment and retirement planning firm with offices in Bakersfield, Lancaster and Ridgecrest. Your questions and comments are welcome at 800-914-6837or e-mail atabarkate@calfinancial.com. |
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