This post provided by FiveCentNickel.com.
In thinking about how much money you need for retirement, you need to consider both your age at retirement and how long you can reasonably expect to live. The earlier you retire or the longer you expect to live, the more youll need to ensure a comfortable retirement, so Just how long do you expect to live?
A brief history of life expectancy
Back in 1900, a newborn in the United States could be expected to live 47.3 years. In 1950, that number had risen to 69.7 years, and by the year 2000, it was 76.8 years. According to the most recent CDC estimates, which are based on data from 2007, life expectancy in the United States currently stands at 77.9 years.
As a side note, this increase in life expectancy is one of the reasons that many pension plans and Social Security have been struggling to make ends meet. In fact, Americans are living nearly twice as long in retirement as they did back in the late 1960s.
The above estimates, of course, are based on broad averages so theyre not all that accurate for any particular individual or situation. Moreover, theyre for newborns, so they dont account for the fact that youve already survived for (say) 40 years, and thus are likely to live somewhat longer than average. What we need, then, is a tool for personalizing the prediction.
Personalizing the prediction
Guess what? Ive found a great calculator for doing just that. It was put together by researchers at the Wharton School of Business at UPenn. It was actually created with life insurance in mind, but it works equally for getting a better handle on how long you might expect to live in retirement.
Its pretty detailed, so it takes a few minutes to run through it, but its well worth the time. Heres the link (or click the graphic, below). And here are my results:
Obviously, you cant put too much stock in a point estimate like this, but its definitely informative.
Assuming that I retire at the traditional age of 65, I can expect to live roughly 23 years in retirement though, based on the lower and upper quartile estimates, it could be as short as 15 years or as long as 33 years. If I retire earlier, Ill have an even longer post-retirement existence.
The takeaway
An important takeaway here is that retirement isnt the finish line. Not only does your expected time in retirement govern how much money youll need to make it through to the end, but it also influences how aggressively you should be investing.
The general consensus is that you should invest more conservatively as you get closer to retirement. This makes good sense, as your time horizon will be getting shorter and shorter as time wears on. That being said, shorter does not necessarily equal short. Even once youve reached retirement age, you may have another 20-30 years (or more) to go before the bitter end.
In short, while you may not have time to recover from a stock market drubbing as you approach (or enter) retirement, you also have to be careful not to ratchet things back too far. After all, you cant afford to get too conservative unless youre sitting on an enormous pile of cash.
Anyway Im mostly just musing here. But I am curious to hear about your results. Whats your life expectancy? And, given when you expect to retire, how long will you be living off your portfolio?
The original article can be found at FiveCentNickel.com:
“Life Expectancy, Retirement, and Your Investment Time Horizon”
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