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October 15, 2016

You Could Spend More Years Being Retired Than Working

There might be a limit on how long humans can live. Jan Vijg, a geneticist at Albert Einstein College of Medicine, published research in the journal Nature putting the upper limit for longevity at 115 years. More precisely, The New York Times quoted him as stating, “Humans will never get older than 115.”
Vijg’s conclusion has sparked controversy within the scientific community about whether such a limit to actually exists. An article on Nature.com discusses the study and the challenges to it. For purposes of my commentary, I want to discuss the implications from an investment standpoint. Specifically, a person with a long enough life-span could spend more years in retirement than working.
First the bad news: Most people will not make it to 115 without a big advance in health care. The Social Security Administration (SSA) lists the average life-span for a man reaching 65 today as 84.3 years. It’s a bit longer for women, at 86.6 years. These numbers include those who are expected to have a shorter life-span as well as those who are expected to have a longer life-span. In acknowledgement of this, the SSA says, “About one out of every four 65-year-olds today will live past age 90, and one out of 10 will live past age 95.”
We can use those numbers to do off-the-cuff calculations. If a person starts working at age 22 and retires at age 65, 43 years will be spent working and (hopefully) saving for retirement (48 years, if retirement is postponed to age 70). If this person is one of the 10% to live past age 95, the span of retirement will exceed 30 years. Put differently, this person’s 43 years of saving will need to cover 30+ years of retirement. If the age of 100 is reached, the ratio of working-to-retirement years shifts to 43/35. Make it to 105, and the ratio nearly reaches breakeven at 43/40. You get the picture.
There many variables beyond just how many years a person works and spends in retirement, of course. The career span is influenced by when a person started working and whether or not work was interrupted (due to a layoff, child care, etc.) The retirement span is influenced whether a person retires earlier (e.g., age 62) or later (e.g., age 70). A traditional career can be followed by temporary, consulting or part-time work in retirement, altering what it means to retire. Financially, the amount a person can set aside early in a career likely pales in comparison to what can be saved late in a career, assuming advancement in one’s profession. Higher-earning years later in a career can offset or replace low-earning years for Social Security benefit calculations. Inheritances, pensions and housing (through downsizing or a reverse mortgage) alter retirement cash flow needs. As such, merely calculating a ratio of working-to-retirement years is overly simplistic.
What the ratio does do, however, is put things into perspective. It highlights the importance of saving early and consistently for retirement, adhering to a long-term investment strategy, retiring later not earlier, delaying claiming Social Security benefits and having a plan for taking withdrawals once in retirement. The ratio also highlights why some retirement experts think annuities are a good idea for ensuring you don’t outlive your savings. If you think you will be blessed with longevity, the ratio could even prompt you to consider whether working in retirement makes sense. Finance is full of complex formulas; sometimes, simplistic ratios work better for helping someone grasp a big concept.
The new study on longevity should also prompt a review of life insurance policies. Those of you with permanent policies (e.g., whole) should make sure that you know what your policy's maturity age is. If your policy is old enough, it may mature when you reach age 95 or 100. Even if you have a newer policy, it may be well worth the effort just to check. Even if you don’t make it to 115, you want to ensure your policy is set up to outlive you.
The Week Ahead
Earnings season will pick up as 11 members of the Dow Jones industrial average are scheduled to report: International Business Machines (IBM) on Monday; Goldman Sachs Group (GS), Intel Corp. (INTC), Johnson & Johnson (JNJ) and UnitedHealth Group (UNH) on Tuesday; American Express Co. (AXP) on Wednesday; Microsoft Corp. (MSFT), Travelers Companies (TRV) and Verizon Communications (VZ) on Thursday; and General Electric Co. (GE) and McDonald’s Corp. (MCD) on Friday. Joining them will be nearly 60 other members of the S&P 500.
The week’s first economic reports of note will be the October Empire State manufacturing survey and September industrial production, both released on Monday. Tuesday will feature the September Consumer Price Index (CPI) and the October housing market index. September housing starts and building permits, along with the periodic Beige Book, will be released on Wednesday. Thursday will feature the Philadelphia Federal Reserve’s October business outlook survey and September existing home sales.
Three Federal Reserve officials will make public appearances: vice chair Stanley Fischer on Monday, San Francisco president John Williams on Wednesday and New York president William Dudley on Thursday.
The Treasury Department will auction $12 billion of 30-year inflation protected securities (TIPS) on Thursday.
About The Author - Charles Rotblut, CFA is the VP and Editor for American Association of Individual Investors (AAII). Charles is also the author of Better Good than Lucky. (EconMatters author archive here
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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