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Lifespan Glass Half Full, Retirement Fund Half Empty?

Practice Management

The average lifespan now is much longer than it was for previous generations. That’s good news! But that half-full glass has effects beyond the obvious. Among them: posing challenges and complications for retirement accounts and planning, which a recent analysis examines. 

In “How Life Expectancy Affects Retirement Planning,” a post on Morningstar.com, Mark Miller discusses what longer lifespans can mean for retirement planning and how those challenges can be met. 

“Most financial advisers assume extreme longevity in their retirement plans as a way to ‘test’ the odds of success against longevity risk,” writes Miller, adding that often illustrations concerning lifespan and retirement assets assume that clients’ lifespans will be upwards of 100 years. And he cites a remark by American College of Financial Services Professor of Retirement Income Wade Pfau that in retirement planning, “It makes sense to pick an age beyond your actual life expectancy, because you have a 50% chance of getting there.”

Such assumptions, Miller argues, may make sense but they also can pose risks and challenges. For instance, he says, the need to save more money in order to be prepared for a longer post-retirement period can be “intimidating — even paralyzing” for some people. But that isn’t the only risk he identifies; another, he says, is being so assiduous about saving that one is “cramping consumption beyond what is necessary, or working longer than you need to.” 

Miller notes that one of the common ways of obtaining an estimate on longevity is to use the Social Security Administration longevity calculator. But he notes that Schulich School of Business Professor of Finance Moshe Milevsky has developed a way to plan for financing retirement that is based on “biological age,” something about which Milevsky expects it will soon be possible to make a prediction.

Miller notes that Stanford Center on Longevity Consulting Research Scholar Steve Vernon argues that retirees should set up retirement paychecks to finance basic living expenses, and use remaining savings to cover travel and entertainment and other such discretionary expenses. 

And some, like JDC Planning founder Dirk Cotton, find the number 100 useful only as a motivator and gauge to show a saver “what you’re up against,” says Miller. To Cotton, he suggests, addressing a longer lifespan is a matter of balancing different risks, and advocates and approach to retirement planning that is not static, but rather is dynamic and adjusted as necessary. 

“The perception of retirees and advisors that you can make this plan once and be done is wrong,” Miller quotes Cotton as saying. “You need to do it periodically, almost every year."