In retirement planning, many factors must be considered and are used as inputs to retirement calculators. The typical variables are the amount of assets you have, how much retirement income you need, your tax rate and most importantly, your estimated life expectancy. However, it is this author’s opinion that life expectancy is often mishandled in retirement planning.
The main problem occurs because individuals and even financial advisors will select an average life expectancy as a particular point. For example, often used tables are the IRS IRA minimum minimum distribution tables in IRS Publication 590. On these tables you look up your current age to find the remaining years of life expectancy (see below). We see that if you have attained age 72, you have a remaining life expectancy of 15.5 years.
Of course, the number you find is the average or median in which case we can assume 50% of the people die before that age and 50% die after. If you use that average life expectancy figure in your retirement planning, you have a 50% chance of out-living your money because you may be one of the two people who live longer than the average. Since you’d like to avoid that, let’s offer another approach.
The other approach is to supply you not with a specific point, median or average life expectancy but rather a probability distribution for your life expectancy. In planning for your retirement and how long your money must last, what you’d really like to know is the answer to the following question. Given that I am already age 72 what is the probability of me living to age 85 or 90 or 95? By knowing the probabilities of life expectancy to certain ages, you can then make a plan that includes an accepted risk for out-living your money. For example, at age 72, one has a 20% chance of living to age 92 or longer. If you find that 20% risk of out-living your money acceptable, then you would use age 92 in your retirement planning so that your plan forecasts your money to last that long.
Without such a probability distribution of life expectancy, using any single point will probably lead to a flawed retirement plan. This missed estimation of life expectancy has been the weak link in retirement planning.
Download your probability chart of life expectancy.