Life Expectancy And Financial Planning
In the field of financial planning, the topic of Life Expectancy is often ignored or given nowhere near enough attention
People love to talk about the risk of losing their money and use “risk versus security’ as a basis for their investment choices.
However, the biggest risk you face is actually that of out-living your money. Simply put, if you were to spend all your investment assets too soon and deplete your financial resources well before you pass away, you would put yourself in a position where the potential to satisfy your personal lifestyle choices would be dramatically reduced. Heavy reliance on Government welfare benefits could be a significant limiting factor for you and your lifestyle.
Reliance on averages leads to poor outcomes
You may be wondering how you can plan for your final years when you don’t actually know how many years, or decades, that is likely to be. The answer is to think more about your life expectancy, based on your genetic make-up, socio-cultural factors, and your overall health and wellness, and to place more reliance upon the impact these factors could have upon your financial planning. However, the problem with the usual type of calculations sits with the use of averages. I believe that amongst industry specialists in the financial planning arena, as well as amongst the general public, there is far too much reliance on standard “averages”.
Most of the calculators designed to work out how long your money will last, use “average life expectancy” as a default, with no consideration (let alone ability) to change, this number.
Please consider. If you were to want, for example, $60,000 per year in your retirement, there is a massive difference between needing this only until your mid-eighties or needing it for a further five, ten, or fifteen years. This is where most pre-programmed calculators fail. They base the amount required on an “average life expectancy”, with no differentiation of how needs may change from year to year within the remaining period you may be alive. This creates a result that is often mis-leading, especially if you live longer.
To achieve an average there must be results that are both higher and lower. That is, there must be people living both shorter and longer lifespans than the average. Keeping in mind that you may live longer than the average, you must carefully ensure that you do not underestimate the amount you have to save.
What are the averages we must consider for Financial Planning?
According to the Australian Institute of Health and Welfare, for Australian children born in 2016, the average life expectancy was calculated at 80.4 years for boys and 84.6 years for girls. These numbers are interesting , but the more important point for most of you is that men aged 65 in 2014 to 2016 could expect to live until 84.6 years old (another 19.6 years from now) and for women the expectation extends until age 87.3 years old (a further 22.3 years from now).
At this point of delving into this topic, the “averages” already need closer examination, and even with the points above considered, this is still just a starting point.
How long will you live?
So what should you estimate for a Life Expectancy? People love to flippantly say “I won’t make the age of xx”. This remark should not just bring an abrupt end to discussions about life expectancy. Everyone needs to consider family history, when their parents passed away and of what causes. Maybe your parents are still alive and even well beyond the age that you feel you won’t reach.
Next, take a look at your health and lifestyle, and think about how many years away the average life expectancy is right now for you.
My view is that when you are calculating how much money you need to retire, you would be wise to use age 100 as a basis for your life expectancy, unless there is a really compelling reason to do otherwise. The initial response from some people is that this number is unrealistic. However, to arrive at an average life expectancy of mid-eighties, our society clearly has many people living longer than that. Many people are making it to ninety these days. And in our current day and age, it is more common than it used to be to hear of people living until one hundred and beyond.
The point of all this, as I often say, is to build in room for error. By taking the “life expectancy equals one hundred” approach, what is the worst that can happen? If you plan to this goal but die sooner, you would have money left over when you pass away. If this is a concern for you, there are a multitude of options for you to consider. For example, you could spend more on yourself in daily life, or on extra fun things you want to do, or you could give some away to family or charity. Rather than ending up with a shortfall and outliving your capital by living longer than the “average” usually used to calculate your retirement funds, it is far better for you to reach to the future more, so that your retirement planning is actually much easier to manage.
So, when you do your calculations, use age one hundred as the starting point, and then work backwards from there if there is a strong case to do so. This will encourage you to save a larger amount, protect it, and provide yourself with much greater security and certainty.