I was walking back to my car last week in the early afternoon. It was gloriously warm–a little heat wave to warm Washington state’s spring bones. As I walked, the familiar smell of sun-seared asphalt hit my nostrils. The smell instantly time-warped me back twenty years, to the summer days of riding my bike as a kid. Sometimes we forget how powerful our sense of smell can be, until the right scent pulls us back to memories we thought were long forgotten.
Oddly enough, those twenty-year memories didn’t seem like very long ago. On a similar note, my wife and I were talking about the year 2000–it doesn’t seem like nearly a quarter century has passed since that time.
My older friends and clients reading this will laugh. Just wait until you are 60, they chuckle. It only goes faster from here.
I have yet to meet someone who thinks time slows down as they age. Yet when I sit down with many new retirement planning clients, they surprise me with the answer to an important question I always ask during the financial planning process.
How long should we plan on you living for? Or, to flip the question in starker terms: when are you going to die?
The initial response isn’t what surprises me. Most say “Well, I am not sure.” That makes sense: most people don’t know when they are going to die. Most people frankly wouldn’t want to know.
The next response I hear tends to be “Well, my mom/dad is ___” or my “my parents lived to be __.”
What shocks me, however, is the next response: most of my new clients then throw out a number that is less than what their parents lived to be. If a male client’s biological father lived to be 94, they say they plan to live into their late eighties. Clients with parents who were both centenarians have said they expect to live into their nineties.
Usually they don’t have health concerns. Typically there aren’t any extenuating circumstances or differences in the healthiness of their lifestyle. They simply don’t think they will live as long as their parents!
At least until I share the story of Jack and Jill.
Jack and Jill are an average, married, non-smoking white couple. They both turned 60 in 2022. There is a 50% chance that at least one of them will be alive at age 92.
But the life expectancy is only about 77 for someone born today. What is going on here?
Jack and Jill basically avoided decades of unfortunate things that tend to cut people’s lives short. Accidents and unexpected illness earlier in life bring average life expectancy down. But if you make it into your sixties, your odds of living another twenty-five or thirty years are far too high to ignore. Medicine, technology, and our understanding of health have advanced tremendously–life-ending conditions fifty years ago are often solved today with a simple medicine or minimally invasive surgery.
This has huge financial planning implications. Funding a fifteen-year retirement is completely different than funding a thirty year retirement. Life span is one of the biggest levers in the financial planning machine.
An example, purely for reference: a million-dollar portfolio with an after-tax return of 5.6% per year and inflation rate of 3% could generate about $80,000/year for 15 years.
The exact same portfolio and circumstances except needing to last thirty years instead of fifteen could only generate about $47,000/year.
Enter one of the most important mantras in my profession: It is better to have a little left over than to run out too soon. It is better to err on the side of caution when it comes to life span.
Retirement income planning is challenging to get right, but it is also rewarding. If we make the right assumptions, with a cushion for surprises, it can be the difference between staying secure and dignified late in life versus being forced to sell your home, take out a reverse mortgage, or make some painful reductions in monthly spending.
Retirement income planning also means getting the investments right. There is a fine line between investing for growth and investing for income–you need liquidity to weather downturns (because you can bet 20-30 years in retirement will include multiple market crashes and recessions), but you also need enough growth to weather inflation and time.
Of course, there are some people who say they want to spend their last dollar as they exhale their final breath. You can’t take it with you, they reason. While they aren’t wrong (and putting aside any wishes to leave a legacy to your children or community), to them I raise the white flag. As hard as I try, my planning prowess will inevitably disappoint.
To the people in reasonably good health who are contemplating their longevity…I encourage you to smell the equivalent of the asphalt. The next time a deep whiff of something (hopefully legal) takes you back, may you think “It seems like only yesterday…”. And may you have the foresight to imagine yourself twenty years from now, thinking the same thing about 2023, and realizing you might be around for a while longer.