Life Expectancy and Retirement Planning

by bitznbitez

Managing retirement funds for yourself or for another is a challenge.   Part of challenge of answering “do I have enough money” or “how much money can I withdrawal each year” lies in knowing how long the person will live.   Its a very impolite and seemingly immoral question to ponder “When are you ( or I ) going to die ?”   In truth no one could answer it anyway.   But it lies at the very heart of planning.

One approach is to simply look at the average life expectancy by birth year and gender.  This information is available via the Social Security Administration, CDC and various online sources.   The IRS relies on expected life expectancy to calculate your required minimum distributions.  These of course are just averages.  People live longer, lots longer.  I believe the current average age at death is 83 years presently.   I know, and have known, several to live into their 90s.   I’ve known some to die much earlier.

The moral questions for funds you may manage for another center on, “Have I maximized the amount of money available to them during their life ?”.   If a longer than actual life expectancy is chosen as a budget basis the result will be excess money left over unused.  If a shorter than actual life expectancy is chosen the result will be running out of money in retirement and the pain of a drastic life style adjustment that goes with that.

Generally I believe that estimating high on life expectancy is the right path.   Its what I plan for myself and it is what I would suggest anyone plan on.  It also is the more palatable option than saying “Ya I think you ( or I ) are going to die much younger than we hope.”