How to avoid outliving your savings

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How to avoid outliving your savings

It's one of retirement planning's biggest puzzles: How long are you going to be around? No one can say for certain, but dying with money left over sure beats the alternative.


By MarketWatch
How long will you live? As under-over bets go, few are a better challenge.

The problem, however, is it's not like those bets you make on the Sunday football games, which in the bigger scheme of things are of little or no importance. This under-over bet has huge consequences.

Answer it correctly, and you've solved one big part of the retirement puzzle. If you know how long you'll live, you get to eliminate one of the variables in the retirement equation. Knowing how long you will live makes it a bit easier trying to figure out how much to save for retirement and how much to spend down during retirement.

Overestimate how long you will live, and the worst that can happen is that you probably die with money to spare. Underestimate how long you (and your spouse) will live, and you might as well toss those "Life is Good" T-shirts in the Goodwill bin.

"I'd like to argue that longevity, something that we have been planning for, quite frankly has snuck up on us," said Joe Coughlin, the director of the MIT AgeLab, after a recent conference on the future of longevity. And the financial implications of this "sneaking up" for Americans are immense, experts say.

Population is aging nationwide
To be fair, there is a good deal known about how long people in general will live today.

"There are not test-tube elderly," Neal Cutler, the associate director of the University of North Carolina at Greensboro gerontology program, wrote in an e-mail. "We know how many current older people there are, and we know how many 'older' people there will be in 2015, 2025, etc., because all those people are already in the population. That's called 'population aging.' "

Gregory Salsbury, the author of "But What If I Live?," reports that by 2030, the demographics of 32 states may resemble those of Florida today, where a tad more than 17% of the population is 65 or over.

And Cutler said much is known about what's called "individual aging," the study of how people age.

"Here, too, gerontologists, demographers and actuaries have a sound grasp of the longevity of persons who are already alive and who are currently or about to be part of the older population," he said. "If our assumptions refer to the next 20 or 30 years, then I would say that there is a lot of very solid information, data, analysis out there on how long people are likely to live, on the average."

Years beget years
For instance, the average life expectancy in the U.S. was 77.9 in 2004, according to the National Center for Health Statistics. And the older one gets, the longer the life expectancy becomes. In 2003, those age 65 could expect to live, on average, to 83.4, according to the center. And people age 75 in 2003 could expect to live to 86.8.

There's also a great deal not known about longevity. Cutler says living longer doesn't automatically mean living wealthy or healthy. Yes, older people over the past 30 years have -- through better health care, specifically Medicare -- not only added years to their life but life to their years.

But whether that will continue for the next generation of older Americans -- given the assumptions one would have to make about savings rates, investment returns, health and lifestyle -- is too difficult to predict.

And therein lies part of the dilemma. On one hand, people can try to predict -- using average life expectancy, their own family history and lifestyle factors -- how long they might live.

But even then, few people die right on schedule at their age-adjusted life expectancy. Half will die before, half will die after, and people don't know which half they will be in. Not surprisingly, that makes saving for retirement, the accumulation phase, as well as the drawdown part of retirement, the so-called de-cumulation phase, a bit tricky.

Money to spare 'a nice problem to have'
Salsbury said the best way to play the odds when trying to figure out the number is to simply play it safe. People should save more than they think they might need, rather than less. That's especially true because most people tend to underestimate their life expectancy, save less than they should in general and fail to factor in how much health care could cost in retirement.

"Having too much money would be a nice problem to have," Salsbury said. "What should you worry about? Having saved too much or not having enough when you die?"

Others agree that the need to save more is immense, especially in light of the effect of potential health-care expenses in retirement.

"Unless the trends toward overweight and obesity are slowed or reversed, the financial and medical implications are quite severe not only for individuals and their families, but also for society," Yung-Ping "Bing" Chen, a professor at the Gerontology Institute at the University of Massachusetts Boston, said in an e-mail.

"These issues arise from higher outlays for health care as well as from lower earning power of these folks whose physical and mental health status is compromised by diseases of one type or another."

Meanwhile, John Diehl, the president of The Hartford's Retirement Solutions Group, said trying to make sure one doesn't outlive one's assets can be complicated as well. That's especially true for women, who tend to live an average of 10 to 15 years more than men, according to the Maureen Mohyde, the director of corporate gerontology at The Hartford, which sponsored the recent longevity conference.

There's a growing camp of academicians who favor using products such as annuities to create a stream of income that will last throughout retirement.

"One issue is whether people annuitize much of their financial assets or not," Sherman Hanna, a professor in the consumer-science department at Ohio State University, said in an e-mail. "If I do, then how long I live is not my financial problem."

But creating income that lasts a lifetime is only part of the equation. The other part is the spending side. Having income is one thing, but whether it supports a lifestyle is another.

That's why Diehl and other experts say retirees and would-be retirees need to strike a delicate balance between creating a guaranteed stream of income to meet basic needs in retirement and having a pool of assets that grows and can help one maintain a decent standard of living in retirement.

This article was reported and written by Robert Powell for MarketWatch.

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