Longevity and Planning Horizons

New grandchildren are among the things Brent O’Mara has celebrated with clients, and every such arrival is a reminder of how long the horizon this entry describes can run. A planning horizon is the number of years a retirement plan must cover, from the day income from work stops to the day the plan is no longer needed. Its origin is the actuarial table. Insurers and the Social Security Administration maintain tables of how many years people of each age can expect to live, and those tables say that a retirement is longer than most people plan for. By the agency’s estimates, half of all 65 year old women can expect to live past 86 and the average 65 year old man to 84.⁶ The arithmetic of a withdrawal plan, a claiming age or a pension choice is, as the Los Angeles Times put it, in effect a bet on when a person is going to die, and that is the part of the plan people find hardest to face.⁶

The tables and what they say

The tables have moved. When the first Social Security retirement benefits were paid in 1940, remaining life expectancy at 65 was about 13.7 years; today it is about 20.6, a 50 percent increase in the expected length of benefit receipt, and the trustees project a further 1.4 years by 2050.³ Across the whole population, AARP’s employer guidance records a rise in average life expectancy from 54 in 1919 to 79 in 2019, with the mid eighties expected by 2060.⁵ Time magazine put the same change in household terms in 2015: for the first time a newborn American was expected to live to 90, and a person of 65 was presumed to have 22 more, mostly good, years.⁴ The Stanford Center on Longevity cites the Society of Actuaries for the odds at the far end: a 60 year old woman who does not smoke and reports excellent health has more than a 50 percent chance of reaching 90, a 33 percent chance of 95 and a 14 percent chance of 100, and a man with the same profile 42, 23 and 8 percent.²

Figure

The odds for a healthy sixty year old

chance a woman of 60 reaches 90, with 33 percent for 95 and 14 percent for 100

50 percent

chance a man of 60 reaches 90, with 23 percent for 95 and 8 percent for 100

42 percent

Against those tables, the guesses run short. The accumulated evidence shows a prevailing tendency to underestimate longevity: two in three men nearing retirement underestimate the life expectancy of an average 65 year old man, and 42 percent of them by five years or more, while roughly half of women nearing retirement underestimate the figure for a 65 year old woman.¹ Professional forecasters have erred the same way, consistently and in one direction, which the International Monetary Fund identified in 2012 as the main source of longevity risk for pension systems.¹ The error compounds against a second one, since the median worker expects to retire at 65 and the median retiree actually stopped at 61, so that the years to be funded are longer at both ends.¹ The center’s estimate of the stakes is institutional as well as personal: if average lifespan rises three more years by 2050, the cost of aging rises by half.¹ The numbers arriving at the threshold are large. More than four million Americans turn 65 in each of 2024, 2025 and 2026, about 11,200 a day, and each of them must make money last nearly 30 years or longer; the first year of retirement, as one planner told The New York Times, is a mental shift from building net worth to managing cash flow.⁸

Figure

Remaining life expectancy at 65, in years

• 194013.7
• Today20.6
• 2050, projected22

What a life expectancy table cannot do

A table gives an average, and no one lives an average. The Stanford policy brief that proposed raising the retirement age built its case on the unevenness of the gains: wealthier Americans have been living longer and healthier lives while life spans for lower wage workers have barely moved. A Treasury economist found that from ages 63 through 71 people with lower lifetime earnings were about three times as likely to die in a given year as higher earners; the Government Accountability Office concluded that a retiree at the 75th percentile of earnings would survive 17 percent longer than average and one at the 25th percentile 13 percent shorter, which works out to about three and a half years longer than average for a high wage worker past 65 and about two and three quarter years shorter for a low wage one.³ The Urban Institute had tabulated the same gaps in 2006 for Americans born between 1976 and 1980: life expectancy at 30 of 79.4 years without a high school degree against 84.1 for college graduates, and at 62 of 84.0 for the bottom fifth of earners against 86.1 for the top, with much of the difference falling before 62, where disability benefits rather than retirement benefits do the work.⁷ Since the program began, life expectancy at 65 has risen by almost four and a half years for men and more than five and a half for women.⁷

Figure

Longevity by education and earnings, Americans born 1976 to 1980

	Less education or lower earnings	More education or higher earnings
Life expectancy at 30	79.4 without a high school degree	84.1 for college graduates
Life expectancy at 62	84.0 for the bottom fifth of earners	86.1 for the top fifth
Share who take disability benefits	24.8 percent without a high school degree	12.8 percent of college graduates

The table also cannot say what the years will cost or what they will hold. The Stanford center’s reading of the 2016 confidence survey found that only 30 percent of workers 55 and over had saved 250,000 dollars or more, that 17 percent had saved under 1,000, and that 250,000 dollars translated to roughly 10,000 dollars a year of income under the customary withdrawal rule.² Its advice was to plan in three domains at once, health, social engagement and finances, and to treat the decisions of the next five to ten years, when to leave work, how to deploy savings and Social Security, where to live, as the ones with lasting consequences.² Time’s list ran the same way: wait until 70 to claim where health allows, secure a base of income that covers basic expenses, work longer, adapt the house, plan for health costs and find a purpose.⁴ What a table cannot do, finally, is choose the number. A plan built to the average ends when half of retirees are still alive; a plan built to 95 or 100 asks a household to spend less for decades against odds the Society of Actuaries puts in the teens. Individual circumstances, from health to family history to the earnings record the tables themselves sort by, decide which number a household should plan around, and qualified professionals can turn a table into a plan. The rules that force money out of retirement accounts on their own schedule, regardless of the horizon, come next, under required minimum distributions, and the arithmetic that stretches a balance across the years is under the four percent rule.