How long do you need to plan for...or how long will you live?
When working with clients to develop their financial and retirement plans, a key question is, “How long do you want to plan for?”
The reason this is so important is that one of the greatest risks to retirement is “longevity risk” – that is outliving our money.
In general people are living longer today, so most people will have to plan to have their income last longer than previous generations. One of the biggest fears retirees have is outliving their assets, and one of the biggest fears of financial advisors is the same – having their clients outlive their assets.
The Financial Planning Standard Council of Canada (FPSC) has some guidelines for projecting life expectancy in financial plans. Below is a summary of the probability of one spouse living to specific ages.
Current age (M/F):
10% chance of living to:
25% chance of living to:
50% chance of living to:
|Age 40 each||Age 101||Age 98||Age 95|
|Age 50 each||Age 101||Age 98||Age 94|
|Age 60 each||Age 101||Age 98||Age 94|
|Age 70 each||Age 100||Age 97||Age 94|
|Age 80 each||Age 100||Age 98||Age 94|
What the above table means is if a couple are both 50 years old today, there is a 10% chance that one of them will live to the age of 101, a 25% chance that one of them will live to 98, and a 50% chance that one of them will live to 94.
The FPSC recommends that financial planners base their plans on an age that has no greater than a 25% chance of running out of money, unless they currently have specific health risks. Therefore, based on the above chart, most couples today should plan on a life expectancy of 98 years old.
When I talk to clients about planning to live to the age of 100, many say they don’t want to live that long, as they see it as a negative based on declining health. However, what if you could live to 100 while staying healthy? What if by taking care of your self today through eating right and being fit, you could extend your healthy living to much greater ages?
Just think about the potential changes in medicine and technology over the next 25 years. If you are 55 today, what potential medical advances could there be by the time you are 80, and how could these changes extend your healthy life span at that time?
I would suggest revisiting your retirement plans, and looking at the ages on which your plans are based. Are the projections based on current realities? If you need help, contact your financial advisor for this essential analysis.