Retirement Worry Number One: Outliving Your Money

  • Retirement Income

In reflecting on the title of this article, I think I may have given the wrong impression. There are really only two ways to not outlive your retirement income: die prematurely or have enough income and assets to last a long, healthy life. I hope that you understand I’m referring to the later.

Most people face a variety of unknowns in planning ahead for retirement. Between inflation, interest rates, medical costs and investment market performance, it can all be so overwhelming.

In addition to that, you may be questioning whether the benefits promised by Social Security and Medicare will actually be available to you for years to come. Of course, addressing these issues can determine your retirement planning success but the question you should be asking is how long will retirement last.

A good starting point for estimating your retirement duration is a boring set of data referred to as a standard life expectancy table. According to these tables,women in the U.S. are outliving men by about 3-4 years on average. For example, a 60-year old woman currently has an average life expectancy of 23.1 years, to about age 83, while an average man of the same age can expect to live another 19.8 years, to about age 80. (This data is drawn from the Social Security Administration’s Period Life Table.)

Sure these tables are reliable guides for estimating the average life expectancy of large populations, but they have a flaw in personal planning. By definition, half of all people will outlive the average, and a small minority will live well beyond the average. For example, for every 100 U.S. women age 60, about 26 will reach age 90; for every 100 men, about 14 will survive to 90, (according to Social Security).

With that said, the retirement planning challenge changes when your “longevity horizon” extends from age 80 to 90. If retirement assets and income must stretch a decade longer, the need to make good choices and smart decisions increases, as does the risk of mistakes.

But there is more to it than life expectancy tables and chance.

Retirement and the Impact of Inflation

One of the most critical components of retirement planning is to avoid depleting your assets or running short of income in old age. If retirement planning decisions are based on an average life expectancy, individuals have a 50% chance of outliving their money. How do you feel about those odds?

Perhaps the best approach is to plan for a retirement that will last several years beyond average life expectancy. Of course, the longer a retirement lasts, the greater impact inflation may have on the purchasing power of a fixed income.

The table below shows the probability of living from age 60 to various ages. It also illustrates the reduction in purchasing power throughout retirement.

The Probability of Living from Age 60 to Older Ages for U.S. Men and Women

If an individual is age 60 The probability of living to the age in the first column The decline in the purchasing power of $100 through this age
Male Female
70 82.6% 88.6% $70.89
75 68.8% 78.6% $59.69
80 51.5% 64.9% $50.26
85 32.1% 46.8% $42.31
90 14.5% 26.3% $35.63
95 3.9% 9.7% $30.00
100 0.5% 1.9% $25.26

Source: Social Security Period Life Table updated 6/27/06. Social Security Administration. Assumes a 3.5% inflation rate.

Retirement Income Sources That Can Last a Lifetime

With that said, it is possible to build retirement security from income sources that can last a lifetime. These sources form a foundation of retirement planning, especially if you plan on living past life expectancy (which I hope is true).

Social Security

Under current law, Social Security retirement benefits are payable for life to covered workers and their spouses.

Keep in mind that changes in the Social Security system are probable in the years ahead, and it is not clear how retirees will be affected. Until changes are actually resolved, it may not be prudent not to count on Social Security alone.

Pensions

Many employers have paid lifetime pensions in the past to workers and their spouses. However, pensions have lost favor in recent years as more companies have shifted to personally-funded retirement plans, such as 401(k)s.

Retirement Accounts

Retirement accounts such as 401(k)s, IRAs, and Roth IRAs are also another source of retirement income. In fact, these plans have become the sole source of income for many retirees outside of social security.

As difficult as it may seem, it is possible to plan ahead for the risk of outliving your money. The keys to consider are family health history, living habits, and a desire to plan for a period of time greater than average life expectancy. And, remember, a little preparation goes a long way.

Benjamin Franklin once said “By failing to prepare, you are preparing to fail.”

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