Days or Decades?

Each and every one of us has something in common…we don’t know if we are going to be alive for days or decades. Understanding the basic framework of life expectancy and how that impacts your financial decisions is a crucial part of financial planning. Your individual life expectancy is unknown and this uncertainty is the main contingency that has to be factored into your ongoing planning.

Perhaps it might be good to look at what life expectancy means (and what it doesn’t mean). In the broadest sense, life expectancy measures the average time someone is expected to live based on the calendar year of birth. The denotation of average is important as some of those in the birth year will live beyond the time expected, while some will die earlier than expected. The entire group of people, (or cohort), born in the same year as you will include smokers and non-smokers, marathon runners and couch potatoes. Your particular life expectancy is impacted by both DNA and controllable factors like those just listed.

For the past few decades, average life expectancy has been increasing somewhat sharply. Only recently, starting with data released in 2013 has this trend started to wane. Life expectancy in the U.S. is now around age 78 for men and 81 for women. These averages are somewhat higher in countries such as Sweden, Switzerland, Japan and Monaco to name a few.

What appears to be largely misunderstood is how life expectancies work at different ages. That is, if you are a 65-year-old in the U.S., what is your life expectancy? Well, it is longer than what was expected at birth. The pool of those still alive from your year of birth has declined, so those remaining have longer life expectancies than the average. A 65-year-old man in the U.S. has a remaining life expectancy of more than 18 years and women about 21 years.

One of the most practical applications of how life expectancies work is with Social Security. The Social Security Administration has no way of knowing if you will be alive next year or next decade; they do, however, have a good idea of how many of those in your birth year will still be alive. If you are in poor health and don’t believe you will outlive the average life expectancy for your age, perhaps taking Social Security early is a good idea. On the other hand, if your health is good and you think you may outlive your life expectancy, delaying Social Security, (so that the monthly income is higher), may be the best answer. The main takeaway, however, is that there is no perfect approach since the main variable, (days or decades), is unknowable.

Are you including life expectancy considerations in your financial planning? Ready for a real conversation?

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