Americans are living longer

by David L. Danzig

Americans are living longer. The life expectancy for Baby Boomers, those born between 1946 and 1965, is greater than any previous generation.

National Center for Health Statistics tables show that life expectancy increased 30 years, during the 20th Century, from 47 in 1900 to 77 at the millennium. The new tables are reporting that life expectancy of men 65 years old to be another 15.9 years, and women can expect to live an additional 19.2 years.

What do these numbers mean to you? The good news is that your retirement may be years longer than you had thought it to be. That could also be the bad news. It all depends on how well you have planned and saved for it. Longevity, which should continue to increase, could be one of the major factors in retirement planning.

Recent surveys have sought to determine whether Americans are aware of the implications of longer lives in relation to future sources of income. There are questions concerning if Social Security, pensions and individual savings—commonly called the three legged stool—were included in these surveys. There has been no clear answer. These surveys have found that there are serious misperceptions regarding some of the major retirement issues, some of which may have a sizable impact over longer lifespans.

Social Security
The Employment Benefit Research Institute (EBRI) 2005 Retirement Confidence Survey found that the average retirement age is 62 years old. When respondents were asked when they thought they could receive full benefits, more than 50% believed they could claim those benefits at 62 or younger!

Most people will not receive full benefits until 67 years of age. Not being aware of this fact can adversely impact plans regarding when to retire, how much Social Security income to expect, and how much more money will be needed in income. Presently, Social Security payments will account for only 39% of the retiree’s income. In the future, that percentage has nowhere to go but down.

Pension
Defined benefit plans are normally employer-funded retirement plans that provide income for the life of the employee and in some instances, the spouse of the employee. These plans are funded by companies and guaranteed, up to certain limits, by a federal agency. According to figures released by the Department of Labor in 2005, the number of these plans dropped from 139,000 in 1974 to 48,000 in 2000. The number of plans and workers covered has and will continue to decline.

Defined contribution plans such as a 401-k, on the other hand, are mainly employee-funded. Between 1979 and 2000 these plans have more than doubled in the United States, climbing from 331,000 to over 680,000 according to the Department of Labor. The employee decides how much to contribute (as dictated by federal limits), where the money will be invested, assumes all risk and bears all losses. Remember that the employee will also realize all gains in any given market, if there are any.

Savings
Numbers show that the typical working American Household (average age 43) has a retirement savings of $18,750. Sixteen percent have not yet started to save! Midlife households (age 41-54) have reported retirement savings of $30,000 and pre-retirees (age 55 and older) have an average retirement savings of $60,000. Eleven percent have no savings or have not begun to save!

According to the census bureau, there are presently more than 60,000 Americans over 100 years old. What if you are one of the estimated 600,000 centurions in 2040 and you had used age 85 for planning? This is what is known as longevity risk, the real possibility that you may outlive your money!

Planning is needed to avoid a shortfall — How much should you save?

Inflation, compounding in a bad way
What makes inflation so potent a threat is the fact that it compounds over time. Perhaps you retire at 65 and estimate that it will take $100,000 to live your current lifestyle. At 3% inflation—the average over the last 20 years—you will need $200,000 at age 89 for the same standard of life. At 6% inflation you would need the same $200,000 by age 77.

The downside of longevitybr> Simply living longer can add significant expenses. Medical advances may have reduced the incidence of fatal illness, but longer lives are often beset with chronic illness, increased prescription drug use, medical treatments and periodic hospitalizations.

In the field of health care, inflation and longevity combine in an especially dangerous way. The cost of medical care, prescriptions, hospitalization and long-term care are rising faster than the general inflation rate. The longer you live, the more you could be affected.

When discussing retirement savings, emphasis is usually placed on accumulating and saving assets. In fact, when most people reach the age of retirement, the first discussion is how funds are distributed to last for lifetime income. Most retirement plans have different options on distribution of assets, but if the right avenue will be utilized is a completely different question.

When developing a retirement plan, you should consider a number of factors. First and foremost, do not underestimate your life expectancy. This will be the key to your planning. Other considerations include: housing needs, health, dependent care, long term insurance and perhaps lifestyle. Do not forget that retirees are not just living longer, compared to past generations, they are living better and have more active lifestyles. We are not saving what is going to be necessary, as a country, to retire in the manner that most have planned. The question is—what are we going to do about it?