The Problem With Average Life Expectancy

Many advisers (and individuals without advisers) underestimate life expectancy in their wealth/retirement projections. How does this happen? The commonly used data is that of average life expectancies at various ages and by gender. There's an obvious flaw (maybe not so obvious if so many folks commit the error) in using this data. This is "average" data. In other words you have a 50% chance of living either more or less than the indicated age. If you end up living less than the average age, that shouldn't be a problem financially. Your heirs just get their money earlier and they get more of it. The real risk is that you live longer than expected. There's a 50% failure rate inherent in the data. If you plan to live to age 80 with $1 in your pocket, then living to age 90 can be a big problem.

So, what should be done? We recommend extending the life expectancy in planning. Below is a table showing the ages one should use assuming 20% longer lives.

As you can see from the table, rather than using age 80 for a 60 year-old, age 90 would be a more prudent approach and would be successful 80% of the time. Use age 95 if you wanted even less probability of outliving your wealth.