How long will you live?

Everyone hopes for a long and happy life, but did you know economists actually consider living too long to be a risk?

They even have a name for it, “longevity risk.”

It is the condition of living so long that you end up outliving your money.

Find out your average life expectancy using Social Security’s “Life Expectancy Calculator”.

Because no one knows for sure how long he or she (or a spouse) will live, the issue of life expectancy can complicate retirement planning. Think of it like trying to plan a dinner party without knowing how many guests are going to show up.

The good news is, with a few simple planning steps, most of the worries surrounding this issue can be solved.

Facts about the “risk” of living too long,

  • People are living longer now than ever. Improvements in medical technology, disease prevention, treatment, and management have lead to longer and longer life spans.
  • How long can a person live? The answer is really unknown. So far, the oldest living person on record was Jeanne Calment of Arles, France. Jeanne died in 1997 at the age of 122.
  • What is the average life expectancy for U.S. retirees? If you are 65 today, average life expectancy is 84.3 for a man and 86.6 for a woman. Note…these are only averages, so half of the population will live even longer!
  • Marriage is a factor. Married people retiring today have about a 50% chance that at least one member of the couple will live to age 92.
  • Women are more at risk. Because women live substantially longer than men, they are much more likely to become impoverished in older ages.
  • Your precise risk is unknown. An individual person’s exact longevity risk is difficult to determine because it is derived from a mix of factors including, available retirement funds, rates of return on future investments (or market losses), retirement spending rate, inflation, future medical expenses, family health history, and lifespan.

How to solve the problem of longevity risk?

The most important factor for overcoming longevity risk is having enough INCOME to pay your basic living expenses in retirement – especially guaranteed-for-life income that lasts no matter how you live and adjusts for inflation.

For most retirees, guaranteed life income comes from three major sources:

  • Social Security
  • A company (or government) pension
  • Life annuities

Click here for a simple way to calculate how much income you need in retirement and learn FIVE ways to make the cost of retirement more affordable.

Often, people end up combining several sources of income to achieve their retirement goals. The idea isn’t necessarily to have all of your income come from guaranteed sources, but enough to cover your basic living expenses and give you peace of mind. Studies show that retirees with more guaranteed income have less stress and more enjoyable retirements.

So what do you think?

Have you ever thought living too long could be a risk? Do you know of anyone who has outlived their money? What about the issue of women being more at risk? As a husband and a father, I do not want to leave the risk of my wife suffering poverty in very senior age to chance.

Feel free to email me comments or questions. You can also post comments below.

The accidental rise of the 401(k)

Did you know that the 401(k) was never intended to be the primary vehicle to cover people’s retirement? In a cascade of unintended consequences, following no serious public policy debate on the issue, many Baby Boomers now find themselves at a destination in which they were never intended to arrive.

Take a look at this Marketplace article published in June 13, 2013. It features an interview by reporter Scott Tong with Ted Benna, widely considered to be the father of the 401(k):

Father of modern 401(k) says it fails many Americans

A few quotes and observations from the article,

  • Benna says, “…the 401(k) was never intended to cover everyone’s retirement.” Further, he observes that the current system is too complicated and incurs sizeable and unseen fees.
  • Per Benna, “Hey, if I were starting over from scratch today with what we know, I’d blow up the existing structure and start over. What I’m talking about isn’t 401(k). I’m talking about the way investing is done.”
  • The rise of 401(k) plans was accidental. In the past workers had company pensions and Benna was in the business of helping run such plans. In the 1970s, business owners were looking for ways to gain bigger tax breaks.
  • In 1978, Congress passed a hardly noticed add-on to the tax code in Section 401. It was a paragraph denoted with the letter “k.” It represented a tax break that allowed workers to put away cash on the side.
  • Added to this concept was the idea to allow a “match” or incentive to encourage workers to save more. Benna suspected the idea would take off. And it did.
  • In the early 1980s, with big companies leading the way, the new plans were offered in droves. Before long, even companies that never before had any type of retirement plan, were offering the new option.
  • Companies also started ditching what were perceived to be costlier traditional pensions plans – i.e. plans that offer a defined benefit at retirement, say 70% of a worker’s final salary payable for life.
  • Thus, the door was opened, on a completely serendipitous and unintended basis, to the DIY retirement era. Responsibility and risk for making plans a success was transferred from employers onto individual employees.
  • Another unintended consequence was that plans caused increased levels of stock ownership. Benna observes, “Unfortunately, the worst thing that happened with this wretched market is too many had the highest stock ownership that they ever had at the wrong time.”
  • During the mid-1990s bull market, participation in 401(k) type plans rose to 30 million Americans. In spite of this rise in popularity, roughly half of workers in America today still have no retirement plan.
  • Studies suggest that the typical middle class household as only about ten percent of the funds needed for retirement.
  • Benna never meant for this concept to become a do-it-yourself system that would replace traditional pension plans. But now, “This is kinda the whole enchilada…It’s not good, but it’s reality.”
  • The idea was “…simply a financial product that took off.”

So what are your thoughts? Should it bother anyone that such a major piece of piece of public policy happened essentially by accident? I suppose many good things got started that way. Is this one of them?  What are things people can do to make up for the shortfalls they are finding with their 401k plans? What have you tried?

Let me know your thoughts by email or in the comments below.