When planning for retirement, we often look up our life expectancy. One good source of life expectancy information is the Social Security Administration. Among the many tools they offer is a life expectancy estimator. I looked up my own life expectancy. Assuming I live to retirement age (67), the average life expectancy for a woman my age is 87. So that means I should plan for retirement to last till 87, right? Not so much. Remember: life expectancy information gives the average. (I might not be average – what about you?)
I recently discovered a tool called the Longevity Illustrator, offered by the Society of Actuaries. Why is this different than a life expectancy estimator? Because longevity is not the same as life expectancy! Longevity is broader — it addresses the likelihood that a person will live to various ages.
The Longevity Illustrator provides insight into possibilities — what are the “odds” that a person will live to extremely advanced age, for example? Again, I used myself as an example; remember that my life expectancy, assuming I live to age 67, is about 87. The longevity illustrator points out that there is nearly a 50-50 chance I’ll live to age 90, a 28% chance I’ll live to age 95, and a 10% chance I’ll live to age 100!!
What does that mean for our retirement planning? The longevity illustrator explains that each of us needs to decide what level of certainty is important to us. For me, they pointed out that:
- If I am comfortable with a 25% chance that I might run out of money, then I might plan for a 28-year retirement.
- If I want more security — perhaps only a 10% risk that I would outlive my funds, then I should plan for a 33-year retirement.
Anytime our decisions involve unknowns, like retirement does, we need to prepare for some complex thinking. We need to consider a variety of possibilities, and recognize that there will be no certainty; instead, we need to think in terms of probability. We also need to be prepared to be flexible. It’s a challenge, but having good tools can help.
Check out the Longevity Illustrator from the Society of Actuaries and see how it can inform your retirement planning decisions!