November 2010
Barbara O’Neill, Ph.D., CFP®
Extension Specialist in Financial Resource Management
Rutgers Cooperative Extension
Rutgers Cooperative Extension’s national award-winning program, Small Steps to Health and Wealth™ helps people make positive behavior changes to simultaneously improve their health and personal finances. One important connection between health and personal finances is life expectancy. Life expectancy is the remaining number of years that someone is expected to live. The longer people live, the higher their projected life expectancy. People who practice healthy behaviors, such as not smoking, exercising regularly, and eating healthy foods, increase their chances of living a long life.
The life expectancy of Americans has increased remarkably during the last century. 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 assets.
Life expectancy depends upon a number of factors including personal and family health history, occupational health risks, health behaviors, and safety practices (e.g., wearing seat belts). 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 and compare the results of at least three different calculators. Be sure to take note of the assumptions used for each calculator as results will likely vary.
Below are three key financial planning decisions where life expectancy estimates are important:
How Much to Save For Retirement - Whether calculations are done online or with a “paper and pencil” worksheet, life expectancy is a key variable. A higher assumed life expectancy increases the savings requirement. A simple non-commercial retirement savings calculator is the American Savings Education Council’s Ballpark Estimate.
When to Begin Social Security Benefits - From a purely mathematical standpoint, a key consideration is the “break-even point.” This is the age (generally late 70s) where someone receives more from Social Security by delaying benefits to full retirement age (FRA) than they would by taking an early reduced benefit at age 62. Thus, one’s personal and family health history is a key variable.
How to Make Retirement Asset Withdrawals - Studies have found that a “safe” withdrawal method (i.e., one that will not exhaust assets in less than 30 years) is a first year withdrawal rate of 4% of invested assets followed by inflation-adjusted withdrawals in subsequent years. For example, if someone has saved $500,000 and they want it to last, they would withdraw $20,000 ($500,000 x .04) during their first year of retirement, $20,600 in year two ($20,000 + $20,000 x .03), $21, 218 in year three ($20,600 + $20,600 x .03), and so on, assuming a 3% average inflation rate.
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 website, Module 1b, has links to several 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 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 needed to improve your personal health practices.