Social Security’s life expectancy calculator predicts I’ll live to about 86. An insurance company’s version says I should expect to die at 98. A longevity calculator created by actuaries demurs, putting the odds at only 32% that I’ll make it to 95.
Eventually, I’ll find out which life expectancy calculator was most accurate. In the meantime, the different results help illustrate one of the most important and difficult calculations in retirement planning: figuring out when it will end.
People who underestimate their life expectancy could save too little for retirement and run short of cash. People who overestimate how long they’ll live might stay in the workforce longer than they want to or spend less in retirement than they could.
WHY LIFE EXPECTANCY MATTERS
Assumptions about life expectancy can make a dramatic difference in retirement strategies. For example, people who expect their retirement to last 20 years could withdraw 4.7% of their nest egg the first year and have a 90% chance their money would last, according to calculations by David Blanchett, head of retirement research at Morningstar, an investment research firm. To have a similar success rate with a 30-year retirement, the initial withdrawal would have to drop to 3%.
Given those assumptions, someone who wanted to withdraw $25,000 the first year from their retirement funds would need to save about $532,000 to fund a 20-year retirement. Planning for a 30-year retirement would mean saving $833,000, or about 57% more.