Barbara O’Neill, Ph.D., CFP® Extension Specialist in Financial Resource Management Rutgers Cooperative Extension
Some of the most important relationships between health and personal finances involve life expectancy. Life expectancy is the remaining number of years that an individual is expected to live based on actuarial tables used by life insurance companies and the IRS. The longer people live, the higher their projected life expectancy. The life expectancy of Americans has increased remarkably during the last century, extending our ability to be productive and enjoy life. Average life expectancy for a baby born in the U.S. in 2004 was 77.8 years. In 1900, average life expectancy at birth was 47.3. At age 65, average life expectancy is 18.7 years and many people will live a lot longer. With increased longevity come the twin financial challenges of saving adequately for retirement and carefully planning withdrawals from savings so as not to outlive your assets. Life expectancy depends upon a number of factors including personal and family health history, occupational health risks, health behaviors (e.g., diet, exercise, and smoking), safety practices (e.g., wearing seat belts), and more. Hundreds of online life expectancy calculators incorporate these factors and can provide an estimated life expectancy. Simply type the words “life expectancy calculator” into an Internet search engine, such as Google, and compare the results of at least three different calculators. Be sure to take note of the assumptions that are used for each calculator. Results will vary according to the assumptions that are used. People who practice healthy behaviors, such as not smoking, exercising regularly, and eating at least five fruits and vegetables daily, decrease their risk of dying prematurely. They also need to accumulate adequate wealth so they don’t outlive their assets. Stated another way, the “price” of better health is the need for increased wealth. Not surprisingly, financial planners, whose clients tend to practice healthy habits and have good incomes and medical insurance benefits, often run retirement savings calculations out to above-average life expectancies such as 90 or 95. Nobody wants to be the financial planner of a client who runs out of money in their 80s. Quality of later life is also very important and improved by healthy lifestyle choices. On the other hand, time is money. Another impact of a long life upon wealth is that, the longer one lives, the longer compound interest can work its magic to increase the value of your savings. This point was brought home when a 91-year old woman in Sussex County, New Jersey died and left about $3 million to local charities. She was a school teacher, who never made more than $16,000 a year before she retired. People were amazed at both her generosity (many of her bequests were a surprise), as well as her wealth, and the fact that she was, quite literally, “the closet millionairess next door.” How could she possibly have had all this money?” people asked. Further examination revealed that she did everything that books about millionaires advised: she lived below her means, was a shrewd shopper, bought and held high quality blue chip stocks, and invested the maximum allowed in her tax-deferred 403(b) retirement savings plan. In addition, the generous donor had seven decades of compound interest on her side. By living such a long life, she was able to double her assets several times over during the 20 to 25 years of her life. Want to know more about life expectancy and, more importantly, get a realistic estimate of your own? The Purdue University Extension Planning for a Secure Retirement Web site, Module 1b has links to several helpful online life expectancy calculators. The calculators ask questions about your personal and family health history, occupational health risks, health behaviors, safety practices, and other lifestyle habits. Another interesting (and perhaps startling) life expectancy calculator, with a twist, is Real Age which converts your current age into a “real age,” based on the same factors noted above. With the real age calculator, people with health “issues” often have a “real age” that is older than they really are. This can be very sobering. Having real age information may provide the motivation to improve personal health habits (e.g. quit smoking) as well as help people make important financial decisions.