Stan's World: Pushing Out The Planning HorizonSubmitted by S. F. Ehrlich Associates, Inc. on November 15th, 2017
November 15, 2017
What’s the plan if you live too long? Most of us assume (hope?) that we’ll live to some undetermined ripe old age, but determining that number is obviously an impossible task. Yet, calculating life expectancy is one of the most important components when preparing a financial plan.
Financial planning programs are only as good as the data that’s entered, the assumptions that are utilized, and how the output is interpreted. When John and I complete and present a financial plan to clients, the two questions that typically follow are: (1) What do these numbers really mean to me, and (2) Do you think we’ll be able to successfully retire?
The default life expectancy assumptions utilized by our program are based on nationally published mortality tables1 and vary depending on your age. For example, a male and female, both age 65, have life expectancies of 91 and 93, respectively. (That same male and female, at age 73, have a life expectancy of 92 and 94, respectively.) For the record, death is never mentioned by the software program. Rather, the program explains that plans merely come to an end. (While you may not view this as a big deal, let’s be truthful: the expression ‘end of plan’ is less unnerving than seeing the phrase ‘date of death,’ especially when viewing something about yourself.)
Morbidity aside, lately we have been routinely asked to change the default ‘end of plan’ dates. Whether it relates to the lifespan of a parent, or perhaps a centenarian aunt, clients want to know whether or not their plans will work should they reach age 95, or even 100. (While the odds may still be stacked against a couple both living into their 90’s, look for those odds to go up in the coming years.)
Planning for a 35 or 40-year retirement puts a lot of pressure on a portfolio. When the markets are up, of course, few wonder: “What can go wrong?” but an oft-used expression from Wall Street is trees don’t grow to the sky. For years, I’ve used the expression: “The good news is we’re all living longer, and the bad news is we’re all living longer.” For citizens of all ages, this makes the process known as financial planning critically important.
You don’t need a calculator to do the math. If you work for 40 years, can you support yourself in retirement for an additional 30-35? Not only do you have to factor in inflation, but living longer increases the odds of needing nursing care, an often unplanned for expense for elderly seniors. (And an exorbitant one, easily averaging $100,000 - $120,000 per person2 along the east and west coasts.)
Money aside, this added longevity is changing how we even view retirement. Many seniors, for example, are now choosing to work full or part-time in ‘retirement,’ either because they want to, or because they need the income. Others take on jobs for the sense of camaraderie; they enjoy the new friendships and the socialization aspect. Some retirees may not have enough to do to fill their days at home, and working gives them a sense of fulfillment.
Seniors are also turning to charitable endeavors during their retirement years, and planning to have sufficient funds for charitable donations is yet another component to planning for a successful retirement. And let’s not forget extended travel, either alone or with members of the family.
Planning for a successful retirement is complicated, and it’s a constantly moving target. How your portfolio performs is certainly significant, but it’s actually your plan that may ultimately prove the most complicated piece to your retirement puzzle.