Outside the Box: You’re probably going to live a lot longer than you think

This is part one of a three-part series on retirement income planning. Part one will address life expectancy assumptions, part two will address how inflation might impact your retirement and part three will be about a portfolio strategy designed to address those two variables.

I hear a lot of people in the financial planning industry use the phrase, “the risk of living too long,” often referred to as longevity risk. For some reason, it bothers me that we consider living a long life a “risk.” Though it appears that many retirees view it in much the same way given that one of the top fears of retirees today is the possibility of outliving their money.

There are really only two possible outcomes when it comes to your retirement portfolio: You will outlive your portfolio OR your portfolio will outlive you. I believe there are three primary drivers that will determine which outcome you are likely to experience: (1) life expectancy, (2) inflation, and (3) how you choose to invest your funds in retirement.

Establishing legitimate assumptions for life expectancy and inflation is critical and pairing those assumptions with an effective income strategy specifically designed to address those issues is the logical next step. Here, I will address these issues in exactly that order. My hope is you can establish a clear plan for how you might approach your own retirement strategy in a way that might increase your probability of success.

1. Life expectancy

Because I regularly speak to a variety of retirees and preretirees, I like to ask the question of how long they think they might live? I get it, it’s a morose question, but one that results in a potential chain reaction of decisions that can come back to haunt the retiree.

In having asked that question hundreds of times, the typical answer is in the 80s. To this day, I can’t recall a single person that said they’d live into their 90s, but we’ll get to that in a moment.

Technically, their assumption is correct since the average individual life expectancy for a 65-year-old male today is 83 and for a 65-year-old female is 85. But this estimation is missing three critical pieces of the longevity puzzle. (A) These are the averages. (B) These assumptions totally ignore the idea of “joint life expectancy.” (C) And it ignores continued advances in health care.

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If you believe that you will only live into your 80s, then you likely also assume you will only need income for approximately 15 to 20 years. If that’s your assumption, you may be making different portfolio decisions than you would if you thought you might maintain your health into your 90s or longer. If your assumptions are incorrect, it’s possible your entire retirement income plan is incorrect.

One thing I tell almost every client when discussing our conservative assumptions is, “I’d rather you have it and not need it than need it and not have it.” In other words, if I’m wrong and you have too much money, that’s a much better scenario than being wrong and running out of money sooner than you anticipated.

Planning conservatively for a long life will inevitably cause you to make different assumptions and decisions than you might have otherwise made. Let’s look at some actual longevity information.

(A) The problem with averages

Using life expectancy data from the Social Security Administration, Flowing Data created the following interesting visual. I’ve highlighted the “Probabilities for Years Left to Live.” For the average male that is currently 65 years old, approximately 46% will live between 20 and 39 years. A wide range to be sure, but we’re just building an argument here for a moment.

For the average female that is currently 65 years old, approximately 57% will live between 20 and 39 years with an extra 1% living 40 years or more.

Here’s the issue with these two great visuals: they are based on the average male and female. If you are reading this article, there is a high likelihood that you are not average. You’re probably not even close to average.

You’ve likely made an above average income, worked a less physically demanding job, received more and better health care, eaten a healthier overall diet, exercised more, and obtained more education than the average person.

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In fact, education may be the most important factor when it comes to individual increased longevity. John Rowe, a professor of public health at Columbia University and former CEO of the insurer Aetna said, “If someone walked into my office an asked me to predict how long he would live, I would ask two things: ‘what is your age and how many years of education did you receive?’”

If the circumstances above describe you, it’s at least likely that you will live a longer life than “average” on an individual basis.

But wait there’s more.

(B) Joint life expectancy

If you were building your retirement plan expectations around the charts above, you may unknowingly be setting yourself up for failure because the estimates above don’t factor in the idea of joint life expectancy. Your joint life expectancy is the age at which the last survivor would then pass away (meaning you or your spouse). As you’ll see in the graph below from the Society of Actuaries longevity calculator, there is apparently something to being married.

The joint life expectancy for a nonsmoking couple in good health retiring at age 65 is about 92 or 93 years old.

Let that sink in.

The joint life expectancy is about nine years longer than the individual life expectancy of the average 65-year-old male and almost seven years longer than the average 65-year-old female. I hope you’re beginning to grasp what this could mean when planning for your retirement.

And going back to the “you’re not average” issue above, your joint life expectancy could very well be longer than this.

But wait, there’s more.

(C) Medical advances

It would be hard to overstate the progress we’re seeing in the field of medicine. It was just announced in April 2019 that a group of scientists from Tel Aviv University in Israel have produced a 3-D heart using a patient’s tissue via 3-D printing technology.

Take a moment and think of the monumental impact that this could have on your own longevity. The technology they used could eventually be capable of replacing your very own heart using your very own cells and tissue — not to mention other body organs that will inevitably follow — this means your body would not reject it because it’s made out of your own cells.

While 3-D printing technology began in the 1980s, significant strides in the capabilities of this technology didn’t truly become known until the mid-2000s. Fast forward to today, we’re now “printing” body organs. What do you think is going to happen over the next few decades and how do you think this is likely to affect your longevity?

I’ve not even touched on the increased diagnosing accuracy of artificial intelligence or a variety of other medical advances that will almost certainly further extend our lifespans.

If long life is, thankfully, more or less inevitable for many of us, what is the obvious issue that needs to be addressed within a good retirement income plan?

Inflation. Stay tuned for part two.

This column originally appeared on Retirement Field Guide, it was adapted and published with permission.

Any opinions are those of Ashby Daniels and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of the strategy selected. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members.

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