The Life And Death Factor You’re Probably Overlooking In Your Retirement Planning

Do you know your life expectancy? This number may be more important in determining your investment time horizon than how close you are to retirement. Yet, the latter is what we tend to focus on. After all, most people think about how many years they have until retirement when they’re deciding how aggressively or conservatively to invest their money. But unless you’re planning to use that money all at once to pay off a mortgage, purchase a vacation home, or buy an annuity (more on that later), your money will continue to be invested for at least as long as you live, and that could be quite a long time.

Of course, no one knows exactly how long they’ll live in retirement (assuming we even live long enough to retire), but there are better ways of estimating than simply taking a guess based on how optimistic or pessimistic we feel about ourselves. In particular, a site called livingto100.com provides a personalized life expectancy calculation based on factors like your family history, gender, lifestyle, and current health. There’s no charge but you may need to dodge some advertising.

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Once you have an idea of your life expectancy, here are some decisions where it could come into play:

How should your investments be allocated? Unless your life expectancy is less than 10 years, some of your retirement portfolio would fall into the long-term time horizon on our asset allocation worksheet. Of course, risk tolerance is another important factor and that tends to decrease with age for at least a portion of your assets.

Are you saving enough for retirement? This is a tricky one because you’ll want to use a longer life expectancy on our retirement calculator than the actual one you estimate. After all, these numbers obviously aren’t perfect. If you overestimate your life expectancy, you’ll leave your heirs with a little bit extra. Underestimate your life expectancy and you could end up running out of money and eating the proverbial cat food in your later years.

Should you take an annuity or a lump sum from your pension? If you’re fortunate enough to even have this choice, you’ll really want to think about your life expectancy. Since the annuity option provides a guaranteed income for as long as you live, the longer you live, the more money you get.

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If you live to 110, those checks will keep coming (assuming they still have paper checks by then), but if you get hit by a bus the day after you start collecting the money, the insurance company gets to keep the rest. (You can add a beneficiary, but your benefits will be reduced.) If your life expectancy is below average, you may be better off taking the lump sum (or at least your heirs will be). Just remember that when you take a lump sum you control what happens to that money, so if you spend too much too soon, you could eventually run out.

Should you annuitize part of your assets? For the rest of us that aren’t receiving a stream of nice fat pension checks when we retire, we still get to make the same decision. That’s because you can always take part of your retirement account and purchase your own annuity from an insurance company that works the same way. If you live over 30 years in retirement, even the “sustainable” 4% withdrawal may start to look a little less sustainable.

Interestingly enough, when you buy most forms of life, health, disability, or long-term care insurance, insurers usually require you to take a health exam so they can price it. However, this is not the case when it comes to annuities. This gives you the upper hand since the annuity payments aren’t priced according to your health (otherwise, healthier people would get lower benefits and vice versa). If your life expectancy is above average an annuity can be a good deal, but not so much if your life expectancy is below average. The only thing insurance companies tend to look at is your age and gender since women tend to live longer and thus get lower payments.

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When should you start taking Social Security? Social Security takes it one step further and only looks at your age when calculating your payment so all things being equal, men might want to start collecting earlier and women might want to delay. That’s because, for each year you delay, your benefit grows by about 8% per year until age 70. Delaying to get your maximum benefit at age 70 is great if you live until 100, but not if you live until 71.

As you can see, there are downsides to both underestimating and overestimating your life expectancy. After all, a big part of retirement planning is making sure your money lasts as long as you do, so you should probably have an estimate of how long that might be. Otherwise, you’re planning a trip without any idea of how long it might last.