The Fatal Flaw in Most Retirement Plans

Written by Doug Dahmer  |  December 12, 2014

There is a critical issue that continually arises which people don’t tend to think about when it comes to their retirement planning. I’m not discussing their income requirements, retirement age, accumulated assets, government benefits or even their expected rates of return, though they are important. What’s often ignored is their life expectancy.

Your life expectancy is probably a more important decision than deciding how close you are to retirement. Yet, the latter is what the focus is put upon.  Deciding this critical factor then allows you to consider other important things like where are you going to live and for how long will you live there?  When should you downsize and when should you consider a retirement home?

And don’t forget to consider the life expectancy of your spouse – the disparity between your two longevities can have even more significant implications to your planning. How should you split incomes and which assets you should draw from first.

Longevity has increased thanks to medical advances and the fact that many boomers have adopted better lifestyles that often allow them to celebrate their 100th birthday. However, there are many variables that play a role in how long you may live including reducing stress, genetics, eating healthy, exercising and even being married. While we would all agree that living a long life is a good thing, it is important that each individual is prepared for the financial consequences of their longevity.

When Canada set the retirement age, almost a half century ago, at age 65, life expectancy was approximately 72 years old. In a report from Statistics Canada, the average life expectancy for a 65 year old man in 2009 was 83.5 and for a woman it is 86.6. Remember, this is the average, which means over half of the population will live longer than this.

As you can’t see into the future, it’s unclear exactly how long you’ll live in retirement, however there are superior ways of estimating  this rather than simply making a guess based on how you feel about yourself on any given day. A fun, easy and free way to accomplish this is to visit The Longevity Game website, courtesy of Northwestern Mutual Life Insurance. By completing the questionnaire, you will receive a life expectancy calculation tailored to you, generated by factors like your levels of stress, lifestyle habits, current health and family history.

A recent report by the Society of Actuaries entitled ‘Key Findings and Issues: Longevity’, it has been revealed that more than half of the population undervalues their life expectancy and as a result their retirement planning time horizons are much too short.

If you over estimate your life expectancy, you’ll leave your heirs with a little bit extra. However, if you underestimate your life expectancy, you could end up running out of money and having inadequate resources to secure your dignity and independence during your ‘No Go Years’.

According to the report from the Society of Actuaries, “As in 2009, retirees say they typically look five years (median) into the future, while pre-retirees typically look 10 years (median)  ahead when making important financial decisions.”

For most, a big part of retirement planning is making sure your money lasts as long as you do, so to avoid a fatal flaw in your retirement planning it would be a good idea to start with a better understanding of how long each of your  journeys may last.

Share! Facebooktwittergoogle_pluspinterestlinkedinmail
Emeritus Financial