There’s an old joke in the financial industry about how simple it is to ensure you have enough money for retirement: Just figure out when you’re going to die and work backwards from there.
Okay, so the financial industry isn’t famous for its sense of humor. But the absurdity of this joke is its entire point: You can’t effectively plan for a retirement if you don’t recognize the inevitable end-point of that retirement.
And according to research from the TIAA Institute and the Global Financial Literacy Excellence Center (GFLEC), failing to think about your life expectancy is keeping you from adequately preparing for retirement.
GFLEC researcher Andrea Hasler and head of the TIAA Institute Surya P. Kolluri describe the understanding of how long people tend to live upon reaching retirement age as “longevity literacy.” Hasler and Kolluri have determined that weak longevity literacy corresponds with being financially unprepared for retirement.
Here’s how you can improve your longevity literacy, without becoming morbid, depressed, or obsessed with actuarial tables:
Understanding Life Expectancy
On average in the United States, how long will a 65-year-old live?
This is the first question TIAA Institute and GFLEC researchers asked respondents in order to determine their understanding of life expectancy. Only 35% of respondents correctly answered 84 for a 65-year-old man, and 87 for a 65-year-old woman.
Unfortunately, even those who know the life expectancy numbers don’t necessarily understand what that means. “Many respondents think life expectancy is an end point,” Hasler says. Which means a retiring 65-year-old man might think he has 19 years left and that’s it.
But life expectancy is an average. That means some 65-year-olds will live to blow out 90 candles on their birthday cake, and some won’t get to enjoy all of their 70s. However, if you make it to age 65, you’re more likely to see your 90th birthday than you are to die young. 65-year-old men have a 30% chance of seeing 90 and only a 5% to 10% of not making it past 70, while 65-year-old women have a 40% chance of reaching age 90 and a less than 5% chance of passing away by age 70.
In other words, life expectancy is a moving target, rather than a formal summons by the grim reaper. And the longer you live, the more likely you are to have more time.
Retirement Income for Life
Weak longevity literacy can lead to insufficient retirement income in one of two ways: Either you are simply not thinking about death (because who wants to?) or you are underestimating how long you will live.
In either case, you are probably assuming the worst-case scenario is dying relatively young. But is that a worse outcome than living to a ripe old age without sufficient income? Because there’s not really an opportunity to go back to work if you run out of money at age 93.
That’s why Kolluri recommends we shift our thinking about retirement. “Instead of asking yourself how big a nest egg you need, think about how much annual income you need in retirement to maintain your lifestyle.”
This mindset shift will help us overcome any gaps in our longevity literacy. Trying to build a large enough nest egg to last through retirement comes with the built-in expectation that the nest egg will eventually run out. You’re trying to figure out when you’ll die, and work backwards to determine how much money you need. It’s a static metric.
A more dynamic retirement plan focused on ensuring annual retirement income—meaning you have multiple income streams, such as tax-advantaged retirement accounts, taxable investments, annuities, Social Security, etc.—will provide income for life.
The Longevity Bonus
There’s a reason so few Americans have strong longevity literacy and a robust retirement plan. Thinking about your life expectancy and setting money aside for your golden years are not anyone’s idea of a rollicking good time. “It feels like eating your spinach,” Kolluri says.
But it doesn’t have to be that way. Hasler and Kolluri would both like to change the narrative about retirement and make planning for it more joyful.
Instead of the eat-your-spinach slog of setting money aside for a retirement that doesn’t feel real and worrying about the implications of your lifespan, Kolluri suggests that we think of retirement as a longevity bonus. It’s a gift.
So how do you want to spend that time? What do you need to do to facilitate those wants?
Assume the Best
Rather than underestimating or ignoring your life expectancy, assume you’ll enjoy a long retirement. That will help you be proactive in creating a joyful new stage in life, rather than a reactive and unplanned retirement.
Emily Guy Birken is a Milwaukee-based personal finance writer. Her books include: The 5 Years Before You Retire, Choose Your Retirement, Making Social Security Work for You, and End Financial Stress Now.
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