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Retirement savings

October 26, 2016

What your life expectancy number really means

It’s smart to get a reliable estimate of your lifespan when you’re planning for retirement. But there’s a risk in taking that number at face value.

When I was a teenager, I had my palm read, just for fun. I learned I have a long lifeline. That was good to hear, but I didn’t put much stock in the experience, so in the 40-plus years since then, that palm-reading hasn’t influenced a single decision I’ve ever made.

But your life expectancy does matter, and if you get an estimate from a credible source, it should influence some of life’s big decisions. For instance, if you had a good indication that you’d live to 110, that information could influence the decisions you make about your career, your retirement, your lifestyle, your approaches to your health/spending/saving/investing and so on. But if it looked like you’d only reach 60, those decisions could be very different.

Here are 4 key things you need do to reliably understand what life expectancy means to you.

1. Don’t make major decisions based only on results from a free online tool.

Because online life expectancy calculators are designed to be easy to use, they consider only some of the factors that matter in your personal situation. And some online tools include factors, such as happiness, that the longevity measurement experts (called actuaries) don’t use or use differently.

2. Look for credibility both online and offline.

Be selective when choosing an online life expectancy tool. Life insurance companies are acknowledged as credible sources because estimating how long people will live is at the heart of their business. Check out the Sun Life life expectancy calculator. Less-credible creators of life expectancy calculators are more likely to employ pop culture gurus or health supplement chemists than financial advisors or actuaries.

3. Know how to interpret your number.

Here’s what you need to understand:

Assume an online tool calculates your life expectancy at 92. If the tool is well designed (see #2 above), that means it estimates that half of people with the same score as you will live to 92 or more, and half will die before they reach 92. In other words, your life expectancy number is the mid-point of the chances you’ll live to that age. So there’s a big possibility you’ll live longer than 92 (perhaps much longer) or die sooner than 92 (perhaps much sooner). Don’t get me wrong; I still believe there’s plenty of value in knowing the number. But it means you’ll still have a real need to plan for the risk of overshooting your life expectancy and living longer, as well as the risk you will fall short of the number.

Think of it this way: If there was a 50% chance you’d be late for your daughter’s wedding, or a 50% chance your lucky shirt wouldn’t be dry in time for a big job interview, you’d have a back-up plan. In other words, you need to plan to reach your life expectancy number – but also plan for a future that could extend well beyond it. Some other considerations:

  • If recent trends in longevity continue, your life expectancy might continue to rise over time.
  • If you have a spouse or partner, it’s important to plan for the chance that one of you will live significantly longer. For instance, I’ll be 60 this year. I believe there’s a 10% chance that either my wife (whose current age I dare not mention!) or I will live into our late 90s.
  • Some life expectancy numbers you’ll see in media reports are based on the life expectancy of today’s babies (which isn’t helpful for someone your age). Some numbers are based on today’s 65-year-olds (which can be useful if you’re 65 or thereabouts). Some are based on individuals, and some are based on couples.

4. Make a financial plan that guides your big decisions, driven by life expectancy.

You’ll want to get sound financial advice for several reasons:

  • So you can save enough for retirement
  • To ensure that your retirement income will last as long as you need it to
  • To plan for the chance you and/or your spouse will need long-term care
  • So you can choose investments that provide guaranteed income for life
  • To plan for any money you want to leave to your relatives or charities
  • To have enough money on hand to pay healthcare bills

Some financial products, such as life annuities, some types of segregated funds and whole, or permanent life insurance, are specifically designed to handle the risk that you’ll live longer than you expect.

I suggest you get good advice from a financial advisor before you make any of these big decisions. Good luck!

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