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How Do You Forecast Your Own Life Expectancy?

Private investors in the US face the same dilemmas as Britons struggling to plan for retirement, reveals Morningstar.com columnist Christine Benz

Christine Benz 3 September, 2013 | 9:34AM

Retirement planning requires that you make your best guess about a few factors that can be hard to predict: the best mix of assets to hold during retirement, the kinds of returns they're likely to generate, and how long you'll need that money to last. Answering that last question, at its heart, requires that you forecast your own life expectancy -a task that's tricky at best. Guess too long, and you risk dying with a big pot of money left over, at least some of which you might have preferred to enjoy during your lifetime. But if you assume a shorter life span and end up living much longer, you run an even bigger risk - running out of money prematurely.

My colleague Adam Zoll provided some valuable strategies for estimating your life expectancy in this article. This week, I decided to follow up by surveying retired and pre-retired readers about what time horizons they're using for their own retirement-planning purposes and how they had arrived at their estimates.

Readers were quick to weigh in, with many saying they had relied on a number of factors to estimate their own longevities, including life-expectancy tables and family- and personal-health history. Other posters said that estimating one's own life expectancy is a tricky business at best; your best bet is to plan for a very long time horizon and focus on levers you can control, such as spending rate.

'One Never Really Knows'

Many readers said they had used family longevity histories as a starting point, then nudged their estimate higher or lower based on their personal health histories. A number of the respondents said that, to be on the safe side, they had used a longer life expectancy than their relatives had experienced.

Inspectorgadget wrote, "My family has tended to live into the late 80s and early 90s, and I'm in good health, therefore I set my life expectancy to 95. Simple."

ColonelDan took a similar tack. "I kept it very simple by using family longevity averages for both me and my wife then added 10 years just to be safe in estimating how long our portfolio must last."

Orygunduck points out that estimating a longer life expectancy than one's relatives had is only reasonable, given better access to health care as well as better information about the merits of diet and exercise. "For purposes of gifting and estate spend-downs, my dear wife and I use genes as our primary predictor. Her family has very long genes, with almost all of her blood relatives living well into their 90s, including her parents . . . and most of these were longtime smokers and serious beef-eaters . . . go figure. I have some bad cardiovascular genes, but careful diet, cholesterol and high blood pressure management and daily exercise - something my ancestry did not have access to at my age - will likely reduce this risk to me. So we're targeting 92 to 95."

 The post from Johnep points out the fact that indicators about one's own longevity are rarely all pointing in one direction. It's a guess, at best, so this investor went long: "I assumed age 95 based upon recommendations from several articles on the topic. I have also used longevity tools that project my longevity anywhere from mid-80s to mid-90s based upon health and other factors. My father died at age 73 of lung cancer (he was a smoker) and lived longer than the prior two generations. My mother died at 89 and was independent until her last year. I am 68, in good health, exercise daily, do not smoke or drink, and eat a healthy diet. Based upon those factors, it is hard to estimate my longevity. I would hope my health and lifestyle will give me much more longevity, but one never really knows. My wife is in poor health but the genes in her family are good with her parents and siblings living into the 80s."

'It Is Better to Be Very Conservative'

Indeed, several posters said that they're using long time horizons simply because they want to use conservative assumptions in their retirement plans. Baking in conservative assumptions - such as a longer life expectancy and a lower withdrawal rate - is the best way to reduce shortfall risk.

Retiredgary summed it up in this way: "I think it is better to be very conservative in setting horizons and expectations for spending and income. I don't think being old and broke would be much fun at all."

Darwinian is also employing worst-case assumptions. "Vanguard's longevity calculator gave a 28% chance that either I, or my wife, would live for 30 years after my intended retirement date," he said. "When I modeled my portfolio in back-testing, I identified a withdrawal rate that, in the worst case (1929 and 1969), would leave 50% of initial real value after 30 years, to add some margin. As an engineer, I am aware of the importance of worst-case design and safety factors, especially when dealing with uncertainties; and both longevity and market performance are highly uncertain. 

Juris2 has also aimed to be on the safe side, both with his longevity assumptions as well as the specifics of his plan. This investor has opted to delay retirement so that his money will last through long life spans. "Rather than predict my age at death, I've set up my savings, investments, and spending so that they are unlikely to deplete to zero whether I survive well into my 90s, as my parents did, or to 100 or beyond. My wife's family has longevity in it too, so we're hoping for a long ride from here. The key for me was to delay the beginning of my retirement, which (God willing) will happen on my next birthday at age 70. This delay not only shortened my 'expectation of remaining life at retirement,' but more importantly it allowed us to build our nest egg to a much more sustainable size."

But all respondents didn't say they're going long with their life-expectancy assumptions.

Keshavlal wrote, "I based my retirement time horizon on present health of my wife and myself, which is not good. In addition, I used my uncle's age because him and I suffer the same disease. My retirement horizon is little more than average mortality rate in the United States."

Also attempting to incorporate realistic assumptions is dragonpat, who said, "I try to be optimistic about my retirement time horizon but it isn't easy. I myself had cancer once 21 years ago and I while I have not had a reoccurrence, but once you have had cancer, statistically you are at higher risk for having it again. Then there is my family history. My father died when he was 77 but my mother only made it to 53. My younger sister died when she was 52."

Yet, WOODJ countered, life has a funny way of not working out the way you thought it would. After he suffered a heart attack at age 64 in 1998 and his spouse was diagnosed with diabetes shortly thereafter, the couple adjusted their retirement plan in anticipation of shortened life spans. Lo and behold, there still alive and well. "So here we are at my age 80 and her age 73, looking very likely that we will live over 10 years more. Recommendation: Plan on living longer than you think you might. In retirement, maintain investing in stocks and bonds throughout, but be more conservative as you age. Plan your spending and drawdown, but don't cut that too short so as to lower your enjoyment. Work on improving your health."

 'Whose Genes Do I Have? Who Knows?'

In the end, many posters concurred that even though you can make some educated guesses about your life expectancy, in the end they're just that - guesses.

 Counterpoint ultimately concluded that going long on life expectancy is the right plan of action, only because you really don't know. "I must say I chuckle a bit when I see anyone trying to 'calculate' their personal life expectancy. I have two grandparents that died in their 30s, one in his 50s and the other at 98. My father died at 50... my mother just turned 86. Whose genes do I have? Who knows? Unless you know now that you have a condition that will ultimately lead to your death, the obvious fact is you don't know. It could be tomorrow or it could be way in the future. Even if you decide to use the 'odds' established by life expectancy tables... there is a pretty wide distribution there and you could be anywhere on it. Then parse through all the subtables based on gender, race, socioeconomic status... on and on. It matters little. Your own life is not a curve on an expectancy table... it is one data point and you most likely have little clue where it is... so plan long."

Bacholyte's post makes clear that family- and personal-health history can send mixed signals - and lead to mixed results. "I'm a guy with longevity on both sides of the family and blessed with a low cholesterol count that I've done nothing to deserve. In the family tree were many dairy farmers who lived to ripe old ages on milk, eggs, and bacon. One grandmother passed away just short of 101. My aunt and godmother is still flourishing at almost 100. On the other hand, Mom had Alzheimer's as did her mom. I'm a somewhat overweight, absent-minded pipe smoker with a heart condition. If I'm both walking around and knowing where I'm headed after 80, heaven be praised."

Several posters noted that if withdrawal assumptions are conservative enough or if you subsist on your portfolio's income alone, forecasting life expectancy is less imperative. Ggold1146 wrote, "I try not to use any life expectancy because I could die tomorrow. We try to live off of the income generated from the portfolio (along with my wife's pension and my social security). A lot of people think this can't be done for a lengthy time period, but it is true that the older you get the less money you spend (except for health care)."

BorderBeat, meanwhile, feels less of a pull to forecast life expectancy because, as a tenured college professor, he could continue to work as long as he's able. "I haven't set one and probably won't for a while - provided my health remains stable. I am a tenured full professor, and as long as I have my mind I can still work. I love my job, and though I might step down as director of a center I co-founded, I would return to full time teaching. All of my teaching is on line in relatively short but intense courses. I can literally do it from any location. I could literally work until I die and therefore there is no retirement horizon whatsoever."

Xciski8sno urges would-be retirees to focus on what they can control, and one of the best ways to do that is to control spending. "I don't understand the obsession with disposing of all of ones assets. Believe me; others will get rid of all of that for you. Get off the treadmill, turn off the TV's telling you what you need and let the Federal Reserve prop up the economy. Relax, enjoy your friends, a good walk, sunrise, sunset, mountain view, book, movie, favorite fishing hole. For what it's worth, my inheritance consisted of a work and thrift habit that enabled me to retire before 55, nearly 20 years ago. Many are more prosperous, many more aren't. I'm thankful that my savings are comfortable, but the enabling habits started very young."

This article orginally appeared on Morningstar.com

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Christine Benz

Christine Benz  is director of personal finance at Morningstar and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances.

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