While most Americans now expect to live longer than previous generations, many have not factored longevity into planning for retirement. With average life expectancy advancing into the late 70s and significant numbers of Americans expected to live into their 90s, very few people have saved enough money to live their pre-retirement lifestyle for 30 or even 40 years.
It’s important for your retirement income to last as long as your retirement does without having to cut back on your lifestyle. Understanding how long you may actually live in retirement can be helpful in taking a realistic approach to retirement income planning.
The dangers of planning based on life expectancy
First, it's important to understand that life expectancy is only an average. About half of all the members of a certain age group will live past their life expectancy. So if your retirement plan is based on using up all of your income by the time you reach your average life expectancy, you have a 50 percent chance of outliving your income.
Second, life expectancy is not a constant, but rather a moving target. If you've reached 65 already, your life expectancy has already increased. After all, you've survived many people in your age group who died before you. Your new life expectancy based on your current age is called your longevity, and longevity is a more accurate assumption on which to base your retirement income planning.
Consider this: Americans who reached age 65 in 2011 are projected to live another 21 years to age 86, on average. If these same Americans reach age 86, their life expectancy would extend to age 93.
And here's one final thing to keep in mind: While a 60-year old man today has a 20 percent probability of reaching 95 and a 60-year-old woman has a 30 percent chance, there is a 40 percent chance that at least one member of a married couple at the same age will live until 95.
Retiring couples need to carefully consider this when planning for retirement.
Risk vs. comfort
Making retirement income projections should involve balancing the risk of drawing down your income too quickly and being left with little to live on in your 80s or 90s, against spending your income too slowly and needlessly crimping your retirement standard of living.
Look ahead with confidence
It's natural not to want to consider your own mortality. Many workers planning for retirement, and even those on the cusp of retiring, see life after work as a golden time stretching into a hazy horizon. It can indeed be a wonderful second act, but that will depend on your taking an honest look at how far away that horizon really is.
You won't live forever. But you may live longer than you expect. Used correctly, life expectancy and longevity can be powerful planning tools that can help provide a truer picture of what you have to do to make your retirement years both comfortable and secure.
Talk to Wells Fargo
Understanding how to incorporate life expectancy into your retirement planning is essential to developing a retirement income plan that truly meets your needs. Few people approaching this exciting time in their lives have all the answers. That's why sitting down with a financial advisor can help you make more informed and realistic decisions about what lies ahead.
We are here to help you decide which steps are right for you. To get started, contact a Wells Fargo Retirement Professional today.