Life Expectancy Is Elusive Key To Financial Planning

SAN FRANCISCO – How long will you live? Knowing the answer is critical to your financial planning, yet few resources adequately address the question.

"The concept of longevity could very likely be the most dangerous subject that financial planners and individuals project," said Sheryl Garrett, a certified financial planner and founder of the Garrett Planning Network (search), a network of fee-only advisers.

"I just don't think it's been absorbed anywhere close to what could happen," she said.

What could happen? At one extreme, you could live much longer than you anticipated and burn through all your retirement savings.

"If we don't do something about adjusting our thinking now while we have time to make adjustments in our planning and saving so we have enough, one day we're going to wake up broke," Garrett said, who now assumes her clients will live to 100.

On the other hand, if you die earlier than expected you can leave a lot of money behind that you might have enjoyed.

"That might be for your heirs, but it also means you lived a lower standard of living than you could have," said Bob Carlson, author of "The New Rules of Retirement: Strategies for a Secure Future."

Life and death, though, is not an exact science. Financial planners consult mortality tables and note individual clients' health and family history, but guesswork is inevitable.

"I'd love to say we have a wonderful scientific way to approach it," said Linda Lubitz, a certified financial planner and president of Lubitz Financial Group (search), in Miami. She uses 95 as a mortality age for most clients, though for younger clients she'll add on as much as 10 years to account for medical advances.

Use calculators as starting point

For those doing their own retirement planning, online life-expectancy tools make a good starting point. But pick your calculator carefully.

Plug in the same age and health characteristics at 10 online calculators and you'll likely get 10 different answers. Plus, most calculators neglect to state a salient fact: The estimates are based on statistical averages.

"If you use a life-expectancy [calculator], no matter how reflective of your personal situation ... half the time you're going to outlive that number," said Chris Raham, a senior actuarial adviser with Ernst & Young.

The more data the Web site is asking you, the more accurate the projection is likely to be, said Stephen Rosen, an actuary and president of the American Society of Pension Professionals and Actuaries (search).

Even with a detailed calculator, however, remember "these actuarial projections are averages based on large numbers of people. Any one individual can really get burned."

One in-depth tool is insurer Northwestern Mutual's Longevity Game.

And a calculator on the University of Pennsylvania's Wharton School site provides a range of life expectancies, rather than just one number.

Revisit the calculator annually, noted Hal Tepfer, an actuary and vice president of Clark Consulting, a benefits consulting firm. "Check as a 65-year-old, and then at 66, 67," he said. "Every year you live your expectancy table lets you live a little longer."

He too cautioned against putting too much emphasis on the calculators. "It's better than just throwing a pair of dice," he said, but "it makes me nervous that someone relies on this and this alone to do their financial planning."

In general, Christine Fahlund, senior financial planner with T. Rowe Price, tells clients to assume they'll live until age 95. Given longer life spans, she suggests holding off on Social Security payments until age 70.

Expert opinions also vary

To improve on the guesswork, financial-planning software tools should ideally "include the realistic reflection of mortality risk," Raham said. "They consider the fact that when you die is variable." But most financial planners are not yet using such software.

The next best thing is to run your financial plan with different life expectancies. Say, age 84, 88, 90 and 95.

"At least you would be getting some information from your adviser that says 'if I live that long, I understand what my experience is.' We don't believe that's the ideal way to do it," but it's a start, he said.

At a minimum, make sure you have a conversation about life expectancy with your adviser. Ask them to explain how your plan deals with living too long or dying too early, Raham said.

A baby born today has a life expectancy of 77 years, up from 43 in 1900. But life expectancy rises as we age: On average a 65-year-old today lives to 83, according to Centers for Disease Control statistics. That "on average" means half of those 65-year-olds live longer.

For a 65-year-old couple today, there's a 48% chance that at least one will survive to age 90, and a 6% chance that one will live to 100, according to Anna Rappaport, an actuary and past president of the Society of Actuaries.

"Within the last year, I've really thought seriously" about increasing the assumed age from 94 to 100, said Mackey McNeill, a personal financial specialist, and chief executive of The Advisory Team. "My opinion has always been to try to guess on the high extreme. I'm just now wondering whether we're high enough."

Risk tolerance plays into that decision. "If they want close to a zero risk that they will outlive their plan, then you have to set an age of 100 or beyond," said Carlson, the author.

But simply assuming a long life expectancy has downsides: You'll have to save more or live on less.

"If you're the kind of person who wants to live your retirement to its fullest," Raham said, "you're going to look at that [financial outlook] and say 'there's no way. I can't do anything except meet my basic, basic needs.'"