Life expectancy: The most important variable in retirement planning

When I write about retirement and retirement planning, I frequently mention that I aim for my savings and investments to last another thirty years. So, for instance, when I use retirement calculators to determine how long my nest egg will last, I use 78 as my projected age of death. Several readers have written to ask how I arrived at this number.

For example, Richard wrote:

I’m wondering why you’re only projecting out 30 years. You’re only 48. I’m 54 (and retired) and, in my projections and calculations, I go out 40 years. I probably don’t need to plan out that far, but you never know. My last surviving grandparent died just a couple years ago at age 99.

This is a great question. In fact, I believe life expectancy is the most critical factor in determining how much money you need to save -- and how much you can spend. Unfortunately, it's also the variable that's most difficult to calculate with any kind of precision.

Why is Life Expectancy so Important?

When the mainstream media publishes an article about early retirement, the comments are filled with folks who say things like, "These people are cheap. I could never live like that. Besides, what if they drop dead tomorrow? Then what good is all of that money? YOLO!"

On the other hand, early retirement forums are filled with people who go to the opposite extreme. "OMG! I can't believe you're only expecting to live until age 90. What about modern medicine? What about gene therapy? What if you live to 108? Boy, then you're going to be sorry you didn't save more!"

Both sides make valid points.

  • If your assumptions about life expectancy are too optimistic, you risk not making the most of the money you've saved. If you budget as though you were going to live to 95 but end up dead by 65, you'll have a lot of money that essentially goes to waste -- money you might have used to do the things you'd always dreamed of doing.
  • If your assumptions about life expectancy are too pessimistic, you risk running out of money. If you make choices based on the idea that you'll die at age 65, for example, but live until 95, you'll end up broke. You'll spend decades eating beans and rice.

Here's the bottom line: If you knew when you were going to die, you could calculate how much money you'd need to get from now to then.

Pretend that next week Elon Musk announced he'd developed the Methuselah, a machine that can tell users the precise date and time of their death. It's 100% accurate and somehow can even account for accidental death. When the Methuselah comes on the market, you try it just for kicks. It tells you that you'll die on 06 November 2034. You have about seventeen years left to live.

Based on that information, you'd be able to calculate with great precision how much money you'd need in order to make it to your date of death. You'd know whether you need to continue working or could call it quits right now. You'd know whether you had enough saved to travel the world in luxury or if you needed to live a more meager existence.

Unfortunately -- or fortunately, depending on your point of view -- there isn't a way to tell with any precision how much longer you have to live. Elon Musk hasn't developed the Methuselah machine. (Yet.) All you can do is make an educated guess.

How to Determine Life Expectancy

One basic way to estimate your time remaining is to consult an actuarial life table. The U.S. Social Security Administration, for instance, has a basic period life table that shows how much time the average person has left to live based on their current age. A 48-year-old man like me can expect to live another 31.32 years -- until I'm 79.

Life Expectancy (Actuarial Table)

My cohorts and I each have a 0.4167% chance of dying this year. Of 100,000 of us born in 1969, 93,759 are still alive.

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Money story: I achieved financial independence in the U.S. Navy

This guest post from Doug Nordman is part of the "money stories" feature at Get Rich Slowly. Some stories contain general advice; others are examples of how a GRS reader achieved financial success -- or failure. These stories feature folks from all stages of financial maturity. Doug is the , author of The Military Guide to Financial Independence and Retirement and founder of The Military Guide.

My name is Doug, and I'm a retired U.S. Navy submariner. I'm also financially independent.

I graduated from college in 1982 and spent most of the next five years in training or underwater. Like most military servicemembers, I had a steady income but very little free time. I knew how to save but I was very slow to learn how to invest.

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The five types of retirement

A History of Retirement by William GraebnerAs you probably already know, I'm a nerd. I'm such a nerd that during my spare time I like to read books about money. But more and more, regular personal-finance manuals aren't enough. I crave something nerdier! And so, I've begun to research the history of retirement. Right now, I have four or five books on my office desk that are all about the origins and evolution of retirement.

Turns out, retirement wasn't always considered desirable (at least not for employees). In the olden days -- back in the late 1800s -- "mandatory retirement" caused a great deal of resentment among older workers and there was a popular backlash against it. People wanted to keep working, but as big corporations rose to prominence and power, they pushed for a younger workforce.

I haven't really read enough about the history of retirement to write intelligently on the subject, but I wanted to share a quick observation on the nature of retirement in 2018.

You see, while the idea of retirement might be relatively young, it's achieved a level of complexity that I find fascinating. Retirement is no longer one thing. It's many things. Or many possibilities. I thought it might be fun to visualize what I consider the five most common kinds of retirement in our current economy. (Note: Yesterday, we looked at the standard definition of retirement -- and how there's not really any standard definition at all.)

Traditional Retirement

During the 20th century, a standard model of work gained prominence in the United States (and other developed countries). You got a good job, you worked hard for forty or fifty years, and then you retired around age sixty to enjoy the last decade or two of your life. (Your retirement was funded through some combination of company pension, personal savings, and government aid.)

Graphed, the traditional model of work looks like this:

Traditional Retirement

By the 1970s and 1980s, standards of living had risen enough that some folks began to challenge traditional assumptions, even embraced the idea of leaving the workplace.

"Why should we wait until the end of our days to make time to enjoy life?" they wondered. "There's got to be a better way."

Early Retirement

This "better way" turned out to be early retirement. These brave pioneers ran the numbers and demonstrated what would have been an impossibility just a few decades before. If you worked hard to increase your income while simultaneously striving to keep costs low, it was possible to save enough so that you can stop working at fifty. Or 45. Or forty.

Graphed, the early retirement model looks like this:

Early Retirement

The key difference between early retirement and traditional retirement is your saving rate.

The traditional retirement model requires a saving rate of 10% (or maybe 20%). The early retirement model requires you to save half your income -- or more. If you're diligent and build a wealth snowball, you'll eventually reach a "crossover point" (as described in the 1992 classic Your Money or Your Life): The income from your investments will be enough to support your spending. You'll have reached financial independence.

The Crossover Point

These two approaches are the most popular paths to retirement, probably because they lead to permanent retirement. Once you stop working, you're done. To folks still trapped in the Matrix, these might seem like the only options. But I believe there are at least three other types of retirement.

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Defining retirement: What does it mean to be retired?

Welcome to "retirement month" at Get Rich Slowly. During the month of March, we'll explore all sorts of topics related to retirement and financial independence. To start, let's look at the defintion of retirement.

What does it mean to be retired?

This question probably seems silly to some of you. After all, isn't there a dictionary definition of retirement? There is: "The action or fact of leaving one's job and ceasing to work." As is sometimes the case, however, the dictionary definition is less than satisfactory when you take a closer look.

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How to check your Social Security benefits online

Last week, I drove out to the box factory to see my brother Jeff and my cousin Nick. Ostensibly, I made the trip to check up on Mom's financial situation. Really, though, it was an excuse to spend three hours chatting about nothing and everything all at once.

As I was looking through Mom's Social Security info, I decided to check my own account online.

"Look," I said. "I'll get $1125 per month if I start Social Security in thirteen years. If I wait eighteen years, I'll get $1598 per month. That's as if I had another half-million dollars saved for retirement." [I based this very rough estimate on the math for the four-percent rule.]

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My mom is a millionaire!

When I woke up last Thursday, I thought my mother was flat broke. I went to bed with the shocking realization that she's a millionaire.

Long-time readers will recall that my mother has struggled with her health for a number of years. She'd been living on her own, receiving ongoing treatment for schizophrenia, since my father died in 1995. Things gradually got worse until in 2010 we three sons had check her into a psychiatric ward for a couple of weeks so she could receive intensive one-on-one care. She seemed fine after that, but a few months later she experienced a crisis. She drove her car through the back of her garage.

Mom's garage

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Best cities to retire 2018

Best Cities for Retirement - Get Rich Slowly

Retirees may have different tastes in culture and recreation, but there are some basic aspects of a retirement living environment that have fairly universal appeal. Getrichslowly.org ranked the 20 best cities for retirement to help you decide where to spend your golden years, coming up with a diverse list, with choices that span across the country. There are some names on the list you might expect, and some that will probably come as a big surprise.

Methodology

Getrichslowly.org took into account the following criteria when deciding where retirees may want to put down roots:

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The evolution of retirement

If I were to go back to school, I think I'd study retirement. That probably sounds boring to some of you, but I find the subject fascinating. No joke: My bedtime reading lately consists of books like A History of Retirement by Wiliam Graebner.

You see, retirement is a relatively recent concept. It's only really possible in wealthy nations with long lifespans. In 1880, over 75% of American men older than 64 remained in the workforce. They wanted to work. Work was evidence of vitality and productivity. It gave people purpose. Plus, most folks needed the money.

One hundred years ago, retirement was considered undesirable, something to be avoided. A 24 January 1903 article in the Saturday Review summed up the prevailing attitude: "Men shrink from voluntarily committing themselves to an act which simulates the forced inactivity of death."

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Retirement investing with the bucket system

While I'm primarily an index fund investor -- and at 48 years old still have 80% of my money in equities (my only bonds are "legacy" bonds) -- I do like to read about other approaches to retirement investing. I've long been tempted by the Permanent Portfolio, for example.

The November 2017 issue of Kiplinger's features suggested portfolios for five stages of life. Mostly I disagree with them, and I don't like that the funds they promote are expensive. That said, I think their approach to retirement investing is interesting. On the surface, it's the age-old "60% stocks/40% bonds portfolio". What makes it interesting, however, is their reasoning behind this asset allocation.

The Bucket System

Kiplinger's suggests that retirees can balance both risks using what they call a "bucket system". Here's how it works.

  • Divide your portfolio into three "buckets". Each one serves a specific purpose.
  • The first bucket contains one year's worth of living expenses. This money is in cash (or a cash equivalent). So, for instance, if you spend about $36,000 per year, then your first bucket might have $36,000 in a high-yield savings account.
  • Your second bucket contains enough money to cover expenses for nine years. For someone who spends $36,000 per year, this would be roughly $324,000. Kiplinger's says this money should be invested in "high-quality bonds or a fixed annuity". In reality, it should be in something smarter than cash but safer than stocks -- whatever that means to you.
  • The final bucket contains the rest of your retirement savings, which turns out to be 60% of the entire portfolio. You want to invest this money in "stocks and other aggressive options". (For me, this would include real estate.) Your aim is for this bucket to be continually growing.

Naturally, you keep your buckets at the suggested levels through regular rebalancing. From the article:

Replenish your buckets periodically by trimming top performers in your third bucket and by selling bond-fund shares as necessary to refill the cash bucket. If the market tanks, hold off on touching your stock funds until they recover, even if doing so means you draw down your second bucket for a few years to pay for living expenses.

Like I said, this is a traditional 60/40 asset allocation, but it's explained in a manner that actually makes sense to me. It's still too conservative for me, but I could see why other folks might choose this option.

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