How Long of a Retirement Will you Have?

When I do financial planning for a client, the most important aspects of the plan are the inputs.  A plan is only as good as the information you give the software…  and one of the hardest assumptions for people to decide on is their life expectancy.  We know that in general, due to medical advances and healthier lifestyles people are living longer.  How much longer?  Have a look.

 

life expectancy chart
Source: https://www.cdc.gov/nchs/data/nvsr/nvsr66/nvsr66_03.pdf

 

In my opinion, a healthy couple in their 60s should plan for at least 85 years old.  In reality, that number may be 90. In my opinion, it is always better to plan for a longer life expectancy to give you confidence in your plan.

Further, there is an even more significant difference between the probability that one member of a couple remains alive, versus the probability that both are alive.  A solid plan should probably include a material time period where only one member of the couple is alive, with spending adjusted accordingly.

How should you adjust spending projections? The death of one member of the couple doesn’t necessarily mean that spending falls by 50%.  While spending should be lower, my guess is, not much lower.  What really should be adjusted in my opinion is a material reduction in spending in what I would call the “advanced years”.  This is roughly a three year period near the end of life.  At this time, spending on everything other than healthcare most likely drops significantly.

As you look at your retirement plan, the time horizon of that plan is one of, if not the most important parts.  Use assumptions that make sense for you.  #sourceofthesource

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