This New Tool Can Help You Avoid A Devastating Retirement Mistake

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By Walter Updegrave, RealDealRetirement @RealDealRetire

Research shows that most retirees and pre-retirees tend to underestimate how long they might live. Huge mistake. If you build a nest egg and plan to spend it down on the assumption you’ll live to 85 but you make it 95, those extra 10 years could be grim. Fortunately, a new easy-to-use tool can give you a better sense of how long you might be around, which can help you better gauge how much you should save during your career and also ensure you don’t outlive what you’ve managed to put away.

The tool, a joint effort by the American Academy of Actuaries and the Society of Actuaries, is called the Actuaries Longevity Illustrator and it bases its projections on mortality tables used in the Social Security Administration’s Annual Trustees’ Report. Granted, any calculator with the word “longevity” in its title probably isn’t going to have you dropping everything to rev it up. But if you really want to be serious about your retirement planning, I suggest you give it a spin.

Unlike the dozens of online calculators that spit out a single life expectancy age—The Death Clock implies even greater specificity, projecting your “Personal Day of Death” and showing you how many second of life you have left—the Longevity Illustrator provides a range of possible outcomes, giving you a more nuanced idea of how long you may be depending on your retirement savings.

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It’s also user-friendly. No interminable series of questions to answer. You don’t have to give up your name and email address to get the results. Nobody’s trying to sell you anything. You just enter a few key pieces of information that account for most of the variation in life spans: age, gender, whether you smoke and your general state of health. The tool then allows you to see your possible lifespan in three different ways.

The first shows the probability that you’ll live to a series of ages in five-year increments from 65 to 100. For example, a 35-year-old nonsmoking woman of average health would see that she has a a 68% probability of living to 85; a 52% chance of living to 90; a 33% chance of making it to 95; and, a 15% chance of still being alive and kicking at 100.

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If that 35-year-old is trying to figure out how much she needs to save for retirement, this is important information to have. Given the life expectancy figures that are bandied about, she could easily get the impression she needs to save only enough to build a nest egg that will support her into her mid-80s. But by looking at the figures above, she would see that basing her savings regimen on that expectation expose hers to a significant risk of ending up with a nest egg too small to sustain her throughout retirement. Knowing this, she may be able to revise her savings plan so her eventual nest egg will be able to support her if she turns out to be one of the many women her age who will live well into their 90s or beyond.

The second way the results are presented shows the number of years you can expect to live with a given probability. Considering your possible longevity from this perspective can be especially helpful if you’re retired or nearing retirement and want to ensure that you don’t spend down your nest egg too quickly.

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Let’s say you’re a 65-year-old man in excellent health who doesn’t smoke and is trying to set an appropriate retirement savings withdrawal rate. By looking at your longevity stats this way, you would see that you have a 50% chance of living another 22 years, a 25% chance of surviving another 29 years and a 10% chance of living another 33 years.

Clearly, you’ll be able to pull more money from your nest egg each year if you assume your savings must support you for only 20 years or so. But setting your withdrawal rate on that basis would effectively mean you’re okay with roughly 50% chance of running out of money while you’re still alive. For a greater margin of safety and comfort, you might want to base your withdrawal rate for the 25% chance that you may still be relying on your nest egg for retirement income for nearly 30 years. If you come from a long line of centenarians, you may even want to base withdrawals on the 10% chance that you could live another 33 years.

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The third way the tool displays longevity stats is a slight twist on the second. Instead of showing you the number of years you might live given different specific degrees of probability (10%, 25%, 50%, 75% 90%), the third method of presentation allows you to see the probability that you might live a specific number of years. So, for example, with this view the 65-year-old man above would see that his chances of living another 20 years are 61%, another 25 years are 42% and another 30 years are 22%, thus giving him another option for gauging how long he may be tapping his nest egg.

The tool also provides longevity estimates for couples. And, indeed, if you have a spouse or partner and want to increase the odds that your savings will last as long as either of you is still alive, you definitely need to take both lives into account. For example, while the 65-year-old in the example above has a 22% chance of living another 30 years, a 65-year-old nonsmoking woman in excellent health has a 32% chance of living that long and there’s a 47% chance that at least one of them will live for 30 more years.

Bottom line: Whether you’re trying to figure out how large a savings stash you must build for retirement or how much you can reasonably withdraw from your nest egg once you’ve retired, you’ve got to factor in how long you might live. And while you can’t know that for certain, the Actuaries Longevity Illustrator can at least give you a better sense of your chances for making it to various ages, allowing you to make more realistic plans.  (5/18/16)

Walter Updegrave is the editor of RealDealRetirement.comIf you have a question on retirement or investing that you would like Walter to answer online, send it to him at walter@realdealretirement.com. You can tweet Walter at @RealDealRetire.

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