One of the vexing questions in saving for retirement is trying to guess how long you will live once you finally retire. Calculating how long you have to save is simple, perhaps 65 minus your current age. Calculating how long you will live once you retire, so you can budget how much savings you need and how to draw down that savings, requires a lot more thought.
Life Expectancy & Actuarial Expectations
The biological limits of the human body place some upward constraints on life expectancy. Currently the world’s oldest living person is Misao Okawa in Japan at 115 years. The oldest living person in Colorado is Mayree Dougherty of Lamar at 110 years. Clearly these are the upper bounds. Most of us will live a much shorter life and only a few will become centenarians.
The American Society of Actuaries estimates how long Americans will live and life insurance companies utilize this data to price life and annuity policies. The newly revised data shows that Americans have extended their life expectancies by two years over the past decade. Improvements in medical treatments, safety regulations, and lifestyle improvements are helping us live longer.
The Society of Actuaries (SOA) provides a downloadable calculator for calculating life expectancy and the probability of survival for any years. The tool is provided for educational purposes and is intended to give folks a feel of just how long they can expect to live in retirement. The calculator is based on a general population and your personal circumstances should be considered when using it.
I’m thinking of retiring at 65. What can I expect?
From the SOA calculator, a male retiree at age 65 can expect to live 16.5 more years to age 81 ½. From age 65 he has a 30% chance of surviving 22 more years to age 87 and only a 10% chance of living 27 more years to age 92. The female retiree at age 65 is looking at a life expectancy of 19.2 more years to age 84 ¼. She has a 30% chance of reaching 90 and a 20% chance of reaching 92. Clearly women are expected to live longer than men.
How does this affect my retirement planning?
Knowing your average life expectancy allows you to make a plan on how you will spend your retirement savings. You know the average number of years that you will need to provide for your retirement income. You also know the risks of living past the average life expectancy. You know that there is a 30% chance you could exceed the average and live an extra six years. For a lucky few there is a 10% chance that you could exceed the average by eleven years. The risk of exceeding your average life expectancy is known as longevity risk.