Retirement Planning - What Does Life Expectancy Mean?

 

When building a retirement plan, one of the most important factors to consider is your timeline. First, you need to decide when to retire, which will determine how much time you have to accumulate your savings. You also have to figure out how many years worth of retirement income you’ll need. Since no one can predict how long they will live, you will have to take your best guess. To do so, it is helpful to actually understand what “life expectancy” means and why it matters in your planning.

A 50/50 Chance

Everyone from pension planners to insurance actuaries use life expectancy as a baseline from which to determine rates and payouts. But what does the number really tell us? You may be surprised to learn that life expectancy is not the estimated number of years most people live: it is the mid-point or median. In other words, 50% of the population will die before they reach their life expectancy, while the other 50% will live beyond it. So, if your retirement income is set to last you only to life expectancy, there’s a 50% chance you’ll outlive your assets.

Health and lifestyle improvements and continued advances in modern medicine have people living longer than ever before. While in years past, retirement lasted a few years to a decade, nowadays we’re retiring earlier and living longer — a great opportunity in one sense, while an ambitious financial aspiration in another.

Interestingly, once you reach age 65, the likelihood of living beyond your original life expectancy actually increases. A 65-year old man has a 50% chance of living past the age of 851. And, for a 65-year old couple, there is a 50% chance that one member will live beyond the age of 92. Certainly, a long life is something we all hope for, but there is a real longevity risk if we don’t plan properly enough to account for the extra birthday candles.

Expectancy for a Life Well Lived

It can be challenging to create a plan that ensures your retirement dollars last as long as you do. Fortunately, there are guaranteed income solutions for retirees, such as a Guaranteed Lifetime Income Annuity2. With a guaranteed product such as this, the owner enjoys reliable income each and every year for the rest of his/her life. Changes in the market will not decrease this income, and the risk of outliving your assets is eliminated. If inflation is of concern, there is an annual increase option3 that can be added to the policy at purchase that will provide a steady increase to your income over time.

When your retirement income is guaranteed, you no longer need to concern yourself about life expectancy, and can focus instead on enjoying financial security for life. You may not be able to predict the future, but you can — and should — prepare for it.

1 Source: Annuity 2000 Basic Mortality Table

2Guaranteed Lifetime Income Annuities are issued by New York Life Insurance and Annuity Corporation, a wholly owned subsidiary of New York Life Insurance Company. Guarantee is backed by the claims paying ability of the issuer.

3 The policy owner must elect this option at the time of purchase and be at least age 59 ½ at the time of the first income payment.

This material is being provided for informational purposes only. Neither EMA Financial and Insurance Services nor its agents provide legal, tax or accounting advice. Please contact your own advisors for legal, tax and accounting advice.

 

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