How long should you plan to live?
No one can really know, of course. But the answer to that question may be the most critical factor in making a successful financial plan for retirement.
Expected longevity for men and women at age 65 has jumped more than 10 percent since 2000, according to the Society of Actuaries. Men who reach age 65 can be expected to live to an average age of 86.6, and women to 88.8.
And those figures are only averages, said Vickie Bajtelsmit, a professor of finance at Colorado State University whose research focuses on retirement and financial planning. Working with Social Security Administration mortality data, Professor Bajtelsmit calculated that a 65-year-old man has a 20 percent chance to live to 90, and the odds jump to 30 percent if he is in better-than-average health.
Meanwhile, she concluded, 31 percent of women who reach age 65 will make it to 90. And for those with better health, the figure is 42 percent. Here’s what her numbers show:
Those odds produce what experts call longevity risk, which is the danger of exhausting resources before the end of life.
Joe Tomlinson, a financial planner and actuary based in Greenville, Me., who has done extensive research on retirement planning, created a custom projection that illustrates the challenges of managing longevity risk with savings alone; The chart below makes the point that even retirees with sizable savings face significant risk of exhausting their accounts during their lifetimes.
The chart relies on the so-called Monte Carlo method of risk simulation, which analyzes thousands of possible outcomes. Mr. Tomlinson found that a hypothetical couple who had managed to amass $1 million in 401(k) and I.R.A. accounts, and whose annual expenses for essentials would reach $70,000 , faced a 47 percent chance that their retirement plan would “fail” during their lifetimes, assuming they retired at age 65 and claimed Social Security benefits then.
Failure means a forced, sharp cut in living standards. Those whose plans fall into that unfortunate 47 percent “will, on average, fall short of being able to pay for essentials by $168,000 over their lifetimes,” Mr. Tomlinson said. And that’s without considering any high-cost emergency expenses, like home repairs or uninsured medical costs.
Despite the uncertainty, experts offer several steps for mitigating longevity risk. I explored their strategies in my Retiring column for The New York Times last weekend.