Retirement for dummies

Originally Posted by sgl42

the actuarial tables for people born 1953 include the people that died prior to retirement, so that is not the proper number to use. it would be better to use the ave life expectancy for people aged 63, or whatever the retirment age you're looking at is. that will add 2-3 years to the number. a relatively small issue, compared to the much bigger issue which is, for overall retirement planning purposes, you *should* assume your life expectancy is longer than the average. more below.

there is a HUGE problem with how most people interpret the "average life expectancy" numbers. because it is the "average", that means that 50% of the population will live longer than that!

so, if you make your retirement plans as if you'll live the "average age", you have a 50% chance of outliving your money. in my opinion, this is a very dangerous misuse of the number. (unless you're happy with a 50% chance of failure!)

about a decade ago, i actually used to mortality tables to figure out at what age 95% of the people had died, and 99% of the people had died. the implication is that is the target age which you should plan on if you want only a 5% or 1% chance of outliving your money.

the numbers surprised me. i don't recall exactly, but 5% of the population was still alive and kicking at about age 85-90. (exact number was something like 88). and 1% of the population was still going at age 90-95 (i think it was like 93 or 94, but again, i don't recall exactly). (also note, i did it for me, which is white non-smoking male, born tail-end of baby boom. you'd have to use the statistics and mortality tables for your age, ethnicity, etc, which might change the numbers by a few years either way.)

so, the simplistic assumption most people make is:
ave life expectancy = 74. (note: make sure you at least use the life expectancy for the people that have already reached your expected retirement age, not life expectancy of the overall pop'l.)
retire at age 63.
therefore, only have to plan for expenses and inflation for 11 years. well, true if you're comfortable with a 50% chance of failure, and having to try to be a walmart greeter at age 75! not my idea of a good time, but hey, it's your life.

so, if you want only a 5% chance of outliving your money, you need to plan for not age 75, but age 88. that is, not 11 years of expenses and inflation, but 25 years! a rather critical difference, don'tcha think?

of course, social security will keep paying as long as you live. however, i believe the SS COLAs are intentionally too low (to save the gov't money), which becomes more critical the longer you live. also, most private pensions do not have COLAs. and any savings in IRAs and 401ks has to be stretched out longer too.

and this is one of the reasons that so many people are grossly unprepared for retirement. and when they see rather large numbers for what they should have, they scoff and say that's unrealistic.

hopefully, this will prevent a few people from underestimating their retirement needs, and allow you to do a bit more work and planning now, to avoid rather difficult circumstances at an advanced age.

--sgl