Your Retirement Could Easily Be Longer Than You Think

Recent statistics show you’ll probably live longer than you think – but will your retirement money last?

In our experience, many retirement investors have a rather antiquated view of what retirement actually looks like. Many seem to approach retirement as though it will be some short period—perhaps influenced by their parents’ and grandparents’ retirements. Properly assessing time horizon—the length of time you need your money to last—is a critical component of retirement investing. And it’s one all too many Americans bungle based on biases. If you are investing to fund retirement, your time horizon is probably at least your life expectancy, if not your spouse’s (assuming they are younger than you).

Last fall, the Centers for Disease Control (CDC) published the latest version of its life expectancy tables, updated using data from calendar year 2011. For retirement investors, the data is a stark reminder of the actual longevity they should plan for. And separate data and reports add ammunition to the argument higher earners and savers have even longer to plan for.

MORE: Do you know how much your retirement will cost? Do you know how to generate the retirement income you’ll need? The Definitive Guide to Retirement Income will help you find answers to these and other important questions.

The CDC’s report showed a 60-year old American’s life expectancy is 23.1 years. For men, it’s a little shorter (21.6 years) than women (24.5 years). So, doing some simple math, that means from roughly the moment you can legally tap your tax-deferred retirement assets without penalty (age 59 ½), the average American has just over 23 years to fund.

Many investors disregard these statistics, though. Instead, they look at the age their parents or grandparents passed and presume that applies to them. After all, like father like son! (Or mother like daughter. Or mother like son … ah … you get the point.) And family history is definitely a consideration! However, you must factor in advances in medicine and nutrition. In 1991 (20 years before the data in this recent report) the average American 60 – 65 year old male lived another 18.7 years on average. So in twenty short years, average life span for males has increased by three full years! And it isn’t just medicine that’s contributed. Better quality food, less incidence of smoking, more active lifestyles and a higher concentration of service-industry jobs that are less physically taxing all contribute to longer lives.

And that’s only the average. We’re not making any political statement here, but a factual one: Baked into those averages are folks who couldn’t afford great health care. Those who didn’t have access to health information. Those who couldn’t afford higher-quality food. According to a new study by the Brookings Institution, higher earners’ life expectancies have grown significantly more than lower earners’, based largely on a lifetime of better access to nutritious foods, health care and information about health-related topics. As the Brookings study noted:

For men born twenty years later in 1940, the simulated increases in life expectancy added an average of 5.0 years to male life spans. However, the gain in life expectancy was only 1.7 years for men in the lowest decile compared to 8.7 years for men in the top decile. The gains are thus heavily skewed towards men at the top of the income distribution.

Similarly, Brookings found that higher educational attainment is correlated with longer lifespans and higher earnings. So, if you are a high-net-worth retirement investor, the Brookings Institution study suggests you are likely to live longer than the average. Maybe you question their methodology—that’s fine. Either way, it is a fairly logical (if Darwinian) conclusion to reach that someone with better means has longer until they reach their end. And hey, if you know that many Americans will live longer than the average, ask yourself this question: How prepared is your portfolio for the risk you are one of them?

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