How higher life expectancy invalidates your retirement planning calculation

Mortality age aka life expectancy.

Although it is just a 2 digit number, it is so important.

Why?

Because most conventional retirement planning models fail to account for retirement life expectancy correctly.

It can be financially catastrophic.

Worse when it comes a layman using the life expectancy figure in their country of residence and plug this into the retirement calculator.

retirement planning calculation - age

This is how conventional retirement planning teaches you to model your retirement roadmap – it assumes you spend principal to zero at mortality age.

Say if you retire at 50, it assumes a life expectancy after retirement of less than 30 years until 80.

However, with increasing longevity, that is akin to a financial suicide.

Anyone with a mortgage knows how a 15 year amortization includes a lot more principal in the payment than a 30 year amortization. The same is true on a 15 year retirement versus a 30+ year retirement.

As life expectancy lengthens, the amount of retirement principal that can be spent from savings decreases toward zero. So if you agree with the increasing longevity premise, it also means you must plan your retirement as a perpetual income stream while minimizing the depletion of principal.

You are not part of the mortality statistics!

Traditional retirement planning makes does this:

It utilizes actuarial tables to determine your life expectancy.  For example, if the average life expectancy of a male in your country is 77, then you just use this number.

This practice is ridiculous for 2 reasons:

First…

Actuarial tables are backward looking and don’t account for the “age of biology” as you discussed above.

You can’t be only looking at the rear mirror only while driving, correct?

By the time you’re in retirement age, the life expectancy tables can be very different (longer) than when you first plan for your retirement.

Second…

Your life is not a statistical or actuarial event – your kick-the-bucket date can’t be planned based on averages. You may live longer than average, and you can’t afford to risk being part of that group without having the money to enjoy it.

You really have no choice but to plan for a very long life (say, until 100), unless personal health or genetics dictates otherwise. The risk is too large to assume.

In summary, the age of biology and increasing longevity alone virtually invalidates most conventional retirement planning calculations. It forces you to plan for a perpetual income stream instead of depleting your retirement principal.

The other enemy that comes with Longevity…

I consider to be the biggest problem faced by current and future retirees:

Inflation.

Just imagine how different your retirement planning and calculation would be if a dollar today would still be worth a dollar when you died, and would continue being worth a dollar for your children and your grandchildren.

It’s impossible to say the least, but let that imagination sink in.

It’s an amazing thought but let me now yank you back to reality.

The fact is, inflation never sleeps and like it or not, we have to live with inflation’s erosive effects.

It IS a big deal.

Combine the destructive effects of accelerating inflation with your life expectancy issue, and you have a problem that is compounded in retirement planning.

In short, your retirement will not even be remotely close like your parents or grandparents retirement.  The correct strategy for financial planning in retirement needs to match this new reality.

It’s a dynamic problem which requires dynamic solution- namely a system to do regular adjustments.

Conclusion on the Mortality Age in Retirement Planning Calculation

The traditional approach used by experts to figure how much money you need to retire is fundamentally flawed.

At any rate, this completely transforms the savings/retirement equation.

Worse yet, you won’t even know it until it’s too late.

Now that you know this, the next time you use a retirement calculator, you will give it more thoughts before entering that 2 digit figure in the Mortality Age field.

Leave a Reply

HowToFinanceMoney © 2011-Present. All rights reserved.