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August 11, 2004  Email this  Print this
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ASK KIM
Overestimate Your Life Expectancy
by Kimberly Lankford

I'm working on my retirement savings plan and am trying to figure out how long I should count on having the money last. What's the average life expectancy that I should use?

Life expectancies are a tricky thing. Basically, the longer you live, the higher they rise.

For example, using the single life expectancy table in IRS Publication 590, Individual Retirement Arrangements (page 81), if you live to be 50, the IRS expects you to reach 84 years old. If you're 60, your life expectancy rises to 85.

But those are just average figures -- plenty of people live much longer than that, especially if they have good living conditions and access to high-quality medical care. Because these figures continue to rise through time, many financial planners use 100 years or more in their calculations.

If you want a more personalized number, try the Healthspan calculator designed by Thomas Perls, director of the new England Centenarian Study and associate professor at Boston University's School of Medicine. The calculator asks 23 questions about your lifestyle, environment, physical condition and family history. Your answers are weighted according to their potential to increase or decrease the average person's lifespan.

For help calculating whether your retirement savings is likely to last as long as you do, run your numbers through T. Rowe Price's Retirement Income Calculator.

If your savings come up short, don't be tempted to lower the retirement-length figure in the calculation. Instead, look at a few other alternatives:

  • Adjust the investments in your portfolio

  • Delay your retirement date and work extra years to amass more savings

  • Lower your monthly income goal
Run several scenarios through the calculator to see which strategy does the best job of meeting your goals.

For help calculating how much money you'll need in retirement, see A $1 Million Nest Egg May Not Be Enough.

One way to make sure you don't outlive part of your money is to buy an immediate annuity with some of your retirement savings. Because you give up control of the principal, advisors generally recommend investing no more than 30% of your retirement portfolio in an immediate annuity, but this can still provide enough money to cover your essential expenses in retirement no matter how long you live. For more information about immediate annuities, see Guarantee Retirement Income for Life.