What's the downside to planning that you'll live too long?

S.F. Ehrlich Associates |

August 15, 2019

Life expectancy has increased over the past 100 years. Thus, it’s not uncommon for clients to suggest that their retirement plan include an extended life span, sometimes to 95 years or more. But if a plan covers retirement to age 95 (or beyond), is there a downside?

Our clients are individuals, not statistics, but we have to rely on statistics in order to best plan for our clients. If a couple suggests that we should use an extended life span when calculating their retirement plan, since they each have elderly parents and/or family members, we’ll do so. Unfortunately, the price to be paid may impact their lifestyle during the earliest years of their retirement.

While clients tell us one story, statistics may tell us a different one. Using Social Security Life Tables1, for example, the probability of a 65-year old male living to age 80 is 73% and 23% to age 90. For women, the probability of a 65-year old female living to age 80 is 73% and 34% to age 90. For a couple, however, the likelihood that one will live to age 80 is 90% and 49% that one will live to age 90.  There’s even an 18% probability that one will live to age 95.

The planning implications are significant. Set aside too much money for the later years and you run the risk of not having sufficient money to spend during the first third of your retirement years, when you might be healthy enough to travel, enjoy a new car, dine out, and drink fine wine. In contrast, if you spend too much money during the early years, there may not be sufficient assets in later years when more funds are needed for home care or other health issues.

Depicting life expectancy is not exactly like trying to thread a needle, but close. The differences in spending are certainly not trivial: Tell retirees that they can spend 6% of their $1,000,000 retirement portfolio, and they’ll count on $60,000 a year. In contrast, a 4% spending rate drops that number to $40,000 a year. To most retirees, $20,000 a year is a significant amount of money, and that amount is even more significant if these spending rates are applied to portfolios valued at $2,000,000 or more.

There’s a reason why retirement planning shouldn’t be static; there’s no such thing as a set-it-and-forget-it number. While we all worry about what the stock market can do to our portfolio in any given year, or how inflation may impact our future purchasing power, don’t neglect the fact that planning for too long a life span just to be ‘safe’ has the potential to negatively impact your quality of life over the near term.



1 Kitces, Michael. “Life Expectancy Assumptions In Retirement Plans - Singles, Couples, and Survivors.” Nerd's Eye View, 18 Mar. 2014, www.kitces.com.
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