DANGER! – Will You Outlive Your Income?
Take guesswork out of your retirement planning
Which retirement planning calculator tells you how much money you’ll really need for retirement? Which retirement calculator contains a fatal financial flaw that affects every senior and could cause you to outlive your income? Or, is every retirement calculator flawed?
Even the best retirement calculator will ask you to guess the age when you might die – in other words, your life expectancy. (Because so many seniors live past 100, the insurance industry now estimates that our maximum life expectancy is 120 years.)
Often, a retirement calculator for seniors will also ask you to guess the future rate of inflation – without giving you a clue as to what might be reasonable. Or, the retirement calculator will use a built-in financial assumption for inflation that it does not bother to tell you about.
If your financial planning is wrong with either number, you may live like a king – during the first few years of retirement – until you run out of money and have to go on welfare, living the rest of your retirement in poverty. But, if your financial planning is right, you can enjoy a solid, sustainable lifestyle throughout your retirement, with money left over for your heirs.
The future rate of inflation will be … ? ? ?
No one has a crystal ball. So, we have to base our projection on historical data. Since 1950, inflation has averaged 3.9% annually, ranging from a low of -0.5% in 1954 to a high of 13.3% in 1979. (If 1950 is too far back for you, inflation has averaged 4.4% annually since 1960, 4.8% since 1970, and 3.3% since 1982.)
Will you outlive your retirement income?
You can make a huge financial mistake if you use your remaining life expectancy to estimate how long your income should last. By definition, life expectancy is an average for ALL people – half of us will live longer. In other words, life expectancy has only a 50% probability of being correct.
The reality? 11% of today’s 65-year-old men and 19% of today’s 65-year-old women will reach age 95. For every four 65-year-old couples alive today, one person will live to age 95.
When doing your financial planning, you want to be as certain as possible, without overdoing it, that you won’t outlive your retirement income. To accomplish that, we recommend that you base your plans on a 90% probability that your income will last for the rest of your life. Simply select the age at which you plan to retire, or your current age if you’re already retired.
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Source: Average life expectancies and anticipated lengths of retirement derived from United States Life Tables, 2000, National Vital Statistics Reports, Centers for Disease Control and Prevention, U.S. Department of Health and Human Services, Volume 51, Number 3, December 19, 2002.
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About the Author: Internet Entrepreneur - Loving Husband, Proud Father and Grandfather - PASSION: Improving the Quality of Life for Aging Parents and their Family Caregivers
I do agree with all the ideas you have presented in your post. They are very convincing and will definitely work. Thanks for the post.
I originally researched this article 5 years ago, and will be updating it in a few months. It will be very interesting to see how the stats have changed due to the rapid pace of change we’ve seen in health care in recent years.
This is a great article, Mike. Very thorough, very insightful, very practical. Good stuff!