Live Long and Prosper
In the Star Trek saga, Spock would often give the greeting of friendship, “Live Long and Prosper.” When last heard from on the series, he was 139 years old. His father Sarek, lived 202 years. That’s a lot of living long and prospering.
Unfortunately, unless you are also at least one-half Vulcan, you probably won’t last as long. But you will likely live longer than you expect. How long? Let’s take my Mother as an example. When she began drawing Social Security at age 65, her life expectancy was 20 years. That meant that she had a 50% chance of dying before age 85 and a 50% chance of living past age 85.
Mom’s now a bit past her 85th birthday, but that doesn’t mean that her life expectancy has dropped to zero. Instead, because she made it to age 85, she now has a 50-50 chance of making it to age 92. Once Mom gets to age 92, her life expectancy will have grown to age 97. And then? Well, if Mom’s still strutting around at age 97, then she is expected to hit the century mark.
Looking at it another way, at age 65, Mom had a 50% chance to make it to age 85, a 25% chance of making it to age 92, and a 12% chance of making it to age 97. It gets even better if you consider a couple’s estimated lifetime.
For instance, at age 65, odds were 50% that either my Mom or my Dad would make it to age 92 and there was a 25% chance that one of them was going to be around at age 97.
So why am I going through this actuarial study of life expectancy? Because you might need some convincing that you are going to last longer than you think. When I am doing retirement planning for a client, I ask them how long they are going to live. The most common answer is 80.
We’ve heard for years that life expectancy was somewhere between 78 and 82, depending on gender and what study you looked at. The problem with those statistics is that they assume a new-born. Lots of things can kill you from when you leave the womb until you retire. But if you make it to retirement, you made it past all of those problems, proving you’re a survivor. That gets you a higher average lifespan.
Half of everyone who is 65 will still be alive at 85. Therefore, if you are 65 and plan on your money lasting only to age 85, there is a 50-50 chance that you will run out of money before you run out of life. In the financial planning business we call this “longevity risk.” In real life, we call this “broke.”
How long should you plan on having your money last? I typically use the century mark. “No way!” you say. “There is no way I’m going to live until 100.” You are probably right. But what if you are wrong? If you and your spouse are both alive at age 65, there is a 25% chance that one of you is going to still be around at age 97. I don’t know about you, but I’m not willing to take a 25% chance that one of you will run out of money in retirement.
Do your retirement planning so that your money will last. And when you plan, make sure you use a reasonable life expectancy. After all, while running out of money won’t kill you, it won’t make you feel good either.
Gary Silverman, CFP® is the owner of Personal Money Planning, a financial planning and investment management firm located in Wichita Falls. You may e-mail him at Gary@PersonalMoneyPlanning.com. This article was published September 7, 2008 in the Wichita Falls Times Record News.