Retirement Planning for a 115-Year Life Expectancy
A recent study reported that the highest life expectancy for most humans is now about 115 years and that this figure has mostly plateaued. The study brought mixed and opposing reactions from some in the scientific community. According to the Centers for Disease Control as cited by InvestmentNews, there were 72,197 Americans who were 100 years old or older as of 2014. This is up 44% since 2000.
Regardless of the what the top-end number is, it's safe to assume that we are, on average, living longer. But for the sake of discussion, what are the financial implications of living until age 115? (For related reading, see: How Long Will You Live? This Tool Will Tell You.)
Saving for Retirement
Someone who retires at age 65 and lives until age 115 will spend 50 years in retirement. And if they began working at age 22 upon graduating from college, this would mean that their working career spanned 43 years. If this person began saving for retirement in a 401(k) or similar plan from Day One, this still means they saved for 43 years to support a 50-year retirement.
The often-repeated 4% rule, which states that a retiree should be able to withdraw 4% of their initial balance and not run out of money over a 30-year retirement assuming a balanced portfolio, would certainly be stretched by a 50-year or greater time horizon. The ravages of inflation become more and more magnified over time. Using the rule of 72, a 3% rate of inflation would mean that a retiree's purchasing power would be cut in half over a 24-year span. That so that cut would happen twice during a 50-year span of retirement. Such a long life expectancy has implications for withdrawal strategies from retirement accounts, investing strategies and a whole slew of other issues.
At the very least, managing retirement withdrawal strategies becomes critical. And lifetime income streams from Social Security, pensions and annuities will become more and more valuable.
InvestmentNews had surveyed 348 financial advisors to determine how their firms were adapting to longer life expectancies in terms of their financial planning for clients and related advice. Their survey showed that on average, these advisors were using a life expectancy of age 91 for men and 94 for women. This compares to the current life expectancies of 84 for men and 87 for women who reach age 65, per the CDC. For those who reach age 75, the life expectancies increase to 86 for men and 88 for women, respectively.
These average life expectancies could well increase over the next decade or so with advances in the detection and treatment of diseases such as cancer. A marked increase in life expectancies could alter the retirement planning landscape. (For related reading, see: Why You Shouldn't Worry About Social Security.)
Social Security Woes
Waiting to claim Social Security benefits until age 70 versus taking them at age 62 increases benefits by about 76%. Various studies over the years have put the break-even point in favor of delaying claiming benefits at age 70 somewhere in a claimant’s 80s. Given that this is the current average life expectancy, the benefits of waiting until age 70 versus claiming at age 62 or a person’s full retirement age of either 66 or 67, can be debated. But with a reasonable expectation of living past 100 or even to age 115, I think it is easier to justify waiting until age 70—the lifetime benefits received will be markedly higher. Additionally, all cost of living adjustments in the future will be from a higher base and this can add up over time as well.
Another question regards the future viability of Social Security. Depending upon what you read or which study you believe, Social Security is either marginally viable or will be in serious trouble some 20 years from now. Rapidly increasing life expectancies certainly won’t help this situation and could put a real strain on both the Social Security and Medicare reserves in terms of their ability to pay benefits to future retirees. This strain could translate into reduced benefits, later ages for retirement or increased payroll taxes on younger workers to support benefits for older workers. None of these options are particularly desirable.
According to an AARP study, 18% of workers age 50 and over said they never plan to retire. Yet the reality is that even though many workers plan to work well into retirement, many find this tough to do due to layoffs or illness forcing them out of the workforce earlier than planned. But some employers may consider pushing back their suggested corporate retirement ages as their workforce lives longer overall, with the hope of capturing more productivity from each worker in their lifetime.
Snowballing Healthcare Costs
Fidelity’s latest study puts the cost of medical care in retirement at $260,000 for a married couple both aged 65. This is up from $245,000 in their 2015 study and from $220,000 in their 2014 study. Implicitly this cost assumes a 25- to 30-year retirement horizon for most people given current life expectancies. Clearly, the cost of retiree healthcare could easily exceed this number for someone who lives until age 115. For many of us, more health issue tends to surface as we age. Healthcare costs could erode your nest egg if not planned for with that type of life expectancy.
While Medicare helps, there are still out-of-pocket costs including premiums for some services, deductibles, copays, coinsurance and other services that are just not covered by policies. For clients who are still working, starting a heath savings account (HSA) to save for retiree medical costs is one idea that should be considered. (For related reading, see: How to Prepare Your Finances for Big Life Changes.)
How Advisors Are Helping Clients Cope
According to the research by InvestmentNews, financial advisors are recommending the following steps for clients to help them cope with increasing longevity:
- Deferring Social Security benefits was recommended by 65% of the advisors surveyed.
- Planning for increased healthcare spending in retirement: 59%.
- Suggesting lower withdrawal rates from nest egg: 54%.
- Offering more retirement-focused products: 45%.
- Suggesting clients take more investment risk: 44%.
- Put clients on a more restricted budget: 22%.
- Advocate less investment risk: 9%.
- No change in their retirement advice: 9% of advisors.
The Bottom Line
We are, on average, living longer. There will be more of us living past 100 years old and perhaps out to 115 years or even longer. This puts a strain on our retirement planning and the savings we've set aside for retirement costs like healthcare. The traditional retirement rules of thumb will need to be revisited. Individuals and financial advisors will need to adjust their assumptions to help make retirement nest eggs last longer. (For related reading, see: Who Will Live Longest.)