By Philip Bachman
One highly important theme in the financial planning field today is longevity risk. As its name implies, the term means the risk of outliving one’s retirement savings. Longevity risk is important to talk about at length with your family and/or financial advisor because its implications are personal and central to retirement planning.
We already know that people are living longer and thus having longer retirements, but let’s consider some statistics to that point. Not long ago (in the big picture) in 1985, the life expectancy of a man and woman was 71 and 78, respectively. In 2015, the life expectancy was 76 and 82. This is the result of medical advances, healthier lifestyles, etc.
But those ages are just average, so many will live well beyond them. Also, the numbers are projected to rise even further. For example, in 2014, there were 72,197 Americans 100 years old or older, which was already a tremendous increase from the past. By 2050, there are expected to be a million Americans 100 years old or older! (Data is from the Centers for Disease Control and Prevention.)
Financial planner Ann Marie Etergino points out that affluent folks tend to live longer than average. In a Barron’s interview (Barron’s, 09/12/2016) she says, “Affluent Americans live longer than average – 43% will live to be at least 95; nationwide, just 19% will do so. The richer you are, the more you need to plan for longevity.”
Advisors have begun and will continue to assume longer lives for their clients. This has implications for individuals’ financial planning, including what appropriate withdrawals from retirement accounts may look like. Talking about the implications proactively is a step in the right direction. (One of the related subjects to talk about is the way health care costs consume an ever-larger portion of retirees’ savings. This will be the subject of an upcoming blog article.)
The following may sound like a generalization, but it is right. It is a blessing to live a long and full life, but regarding finances, it is good to start planning for one early.