You can't plan a retirement without understanding longevity

Here’s a personal question: How long do you think you’ll live? Most people will roll their eyes, believing that only a higher power has the answer to that question. It’s an imponderable. Why bother asking, since it makes us so uncomfortable?

We know the longevity statistics, which tell us that a girl born today is predicted to live to age 90.2, and a boy is expected to live to age 87.3. An estimated 14% of boys and 19% of girls born this year are expected to reach 100. But we won’t be around to see that!

A more relevant look at longevity statistics tells us that if you are 65-year old woman, you're likely to live to age 87. Your male counterpart is expected to live until around age 84. (Yes, on average, women live longer — and that certainly impacts planning.)

But a recent study conducted by the TIAA Global Financial Literacy Excellence Center, found that most Americans are truly in the dark about longevity — their own, and the averages. More than 65% guessed incorrectly when asked about the likely lifespan of a 65-year-old, predicting a far earlier demise.

Why bother thinking about longevity? Because it’s impossible to do real retirement planning without having a reasonable idea of not only the averages but also of the probabilities. If your goal is not to run out of money before you run out of time, you need more than a guess at the probable timing of your lifespan.

Start by going to a fascinating website — Livingto100.com. There you’ll be asked a few dozen questions, anonymously. They start with genetic factors: How long did your parents live, and your sibings? They also ask a few medical questions such as your blood pressure, and medical issues. Then they move on to your personal habits revolving around smoking, drinking, exercise, consuming water and eating green vegetables. Be honest! Even flossing your teeth can have a significant impact on mortality, since gum disease leads directly to heart problems!

After you’ve filled in the short questionnaire, simply click to find your life expectancy. There are no guarantees, of course, but it’s a better place to start your planning than merely looking at averages. And remember, we all think we are “above average”!

Almost every major financial services company has a proprietary website calculator designed to show you how much money you’ll need to retire. And the most sophisticated planners create an analysis of the likelihood your money will last your lifetime, based on your investment and withdrawal strategies, using Monte Carlo analysis programs based on historic returns.

But there’s another dimension to longevity that makes planning difficult. Your retirement lifestyle will not be a straight line in spending (even adjusted for inflation). You’re likely to spend more money in the early retirement years, when you want to travel and dine in restaurants. In time, that spending will dwindle but other costs will arise, namely healthcare issues that might not be covered by Medicare and its supplements. You might even be faced with the catastrophic costs of needing long-term custodial care.

In its annual survey about the cost of healthcare for today’s retirees leaving work at age 65, Fidelity projects that spending to be $157,500 for a single retiree, or $315,000 for a couple — a number that has nearly doubled from the $80,000 for a single retiree estimated in 2002.

One of the most sophisticated financial planning tools is based not only on mathematical factors but on economic-based decision making. It’s called Maxifi Planner (MaxifiPlanner.com) and it was developed by my "Social Security Horror Stories" co-author, economist Larry Kotlikoff. His program takes you into that third planning dimension, and he describes his tool as “powerful and accurate enough to calculate your highest sustainable living standard — starting today — with a plan to maintain and raise that amount — for life.”

Ah, yes, for life. We are back to the original question and the most basic uncertainty: How long will I live? It’s truly unknowable. But it makes sense to take an educated approach to that issue, rather than crossing your fingers and hoping. And that’s The Savage Truth.

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(Terry Savage is a registered investment adviser and the author of four best-selling books, including “The Savage Truth on Money.” Terry responds to questions on her blog at TerrySavage.com.)