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Don't think you'll outlive your money? Think again

By: Humberto and Georgina Cruz

Retire Smart

On average, Americans in their early 60s like us can expect to live close to 20 more years. Nobody in our immediate families has lived longer, so we'll be thrilled if we make it that far.

But in our financial planning, we are assuming at least one of us will make it to age 95, just in case.

This conservative estimate - conservative in the sense our money has to last longer - is one of many assumptions we all must make in our retirement plans.

We don't know how long we will live, how high inflation will be, or what returns we'll earn from our investments, for example. But rather than just guess, we can make reasonable assumptions.

"Making reasonable assumptions is fundamental to sound, long-term financial planning," said Stuart Ritter, a certified financial planner with T. Rowe Price, an investment management firm in Baltimore, Md. The need for reasonable assumptions is such that Ritter chairs an "Assumption Committee" that includes a dozen professionals at his firm.

Focus groups by T. Rowe Price and many other studies we've seen consistently show that Americans tend to underestimate both the likelihood and financial impact of living into their late 80s, 90s and even beyond.

"I am worried about paying for the cruise this year - I will worry about (paying for living expenses in later years) when I get there," is a common response, Ritter said. A separate recent study by the Fidelity Research Institute found pre-retirees on average believe they will need to have their savings last until only age 83, and retirees 75 and under until age 85.

Yet, a healthy 65-year-old man has a 24 percent chance of living to at least 90, and a healthy woman a 35 percent chance. "People have to recognize there is a high probability" they will live longer than they think, said Van Harlow, managing director of the Fidelity Research Institute, a research arm of Fidelity Investments.

In addition, according to the Society of Actuaries, the odds that at least one member of a 65-year-old couple will live to age 85 are 77 percent. The odds that at least one will live to age 90 are 52 percent.

To age 95, the odds drop to 22 percent. With medical advances, we expect these odds to increase.

Like us, financial planners at T. Rowe Price and many other firms consider 95 a reasonable age in projecting how long money has to last in retirement - long enough to mitigate the risk of running out but not so long as to unnecessarily curtail our spending, Ritter said.

How about the argument that we won't be spending as much at age 90 or 95? Or the notion that if one spouse dies, the other can do with less?

We may not spend as much on travel or leisure at age 90 or 95, Ritter said, but we will likely spend more for health care or to retrofit our home for added safety and easier mobility and access.

While some expenses will go down when one spouse dies, property taxes and insurance won't if the surviving spouse stays in the same house.

Also, one Social Security payment will be lost (the survivor will receive whichever was the higher payment of the two). The surviving spouse may have to pay someone to do what the deceased spouse did for free - cooking or cleaning, for example, or even helping the surviving spouse with activities of daily living, such as getting dressed.

In addition, because of inflation, we will almost certainly have to spend more each year just to maintain our standard of living. While inflation has averaged 2.4 percent a year the past 10 years and 4 percent for the past 30 years, we agree with T. Rowe Price chief economist Alan Levenson that a projection of 3 percent a year is a "reasonable middle ground" to use in retirement planning.