I saw a headline today stating “Most People Don’t Understand Life Expectancy Data”…which means they don’t understand the fundamental aspect of retirement planning. A 20-year retirement is drastically different than a 30-year retirement.
So let’s answer: how long will you live?
As of 2020, the average American male lives for 74.5 years, and the average American female lives for 80.2 years. But wait! There’s more.
Imagine you’re 55 years old and planning your retirement. How long should plan for? If you’re male, about 20 years, right? The average death age (74.5) minus your current age (55) yields 20 years. For females, the answer would be 25 years.
Nope! That’s the wrong approach!
Because the average death ages – 74.5 and 80.2 years old – account for all deaths at all ages, including all the unfortunate deaths occurring before age 55. Once you’ve hit age 55, you’ve already avoided those premature deaths. Meaning your most likely age of death will be above average!
We can look at the Social Security Administration’s actuarial data to see this truth in action.
The average 55-year-old male will live another 24 years, to age 79. That’s 5 years beyond the average of all males. The average 55-year-old female will live another 28 years, to age 83. That’s 3 years beyond the average of all females.
The “true mid-life” age for American men is 38 years old. At age 38, their average remaining life expectancy is another 38 years. For women, that true mid-life age is 40.
Maybe you haven’t planned much and now you’re sitting down at 65 years old to figure out your retirement. You have, on average, 17 years (male) and 20 years (female) left to live. That’s 82 years old for males and 85 years old for females.
Every year matters in retirement planning. The difference between dying at 74 and 79 and 82 is huge. Not only that, but you might live longer than average. For example, a 55-year old American male has the following death age probabilities:
- Age 75: 64%
- Age 80: 48%
- Age 85: 30%
- Age 90: 13%
13% is nothing to ignore! That’s a 1-in-8 chance.
In short, don’t look at the average life expectancy of all people. Instead, look at the average life expectancy of people your age. Then bake in some conservatism on top, because there’s 50% chance you’ll live longer than average.
It’s a simple – but vital – financial planning tip.
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