Does Your Retirement Plan Take Increasing Longevity Into Consideration?
- Discover how increasing longevity invalidates traditional retirement planning.
- Why inflation and life expectancy are critical to consider when planning for early retirement.
- Where you can learn the correct strategy to help you create a successful plan for retirement.
Denis, a reader with a background in biology and genetics, posts this question:
“My take is … the coming generation will beat all records in longevity. This century is going to be that of biology as much as the previous one was that of physics. My parents may live to 80-90 years after retiring in their 60s; my siblings and I are probably going to live 120+ years and work well into our 70s. At any rate, this completely transforms the savings/retirement equation. I was curious to know if you gave any thoughts to this in your book How Much Is Enough To Retire?”
Thanks for the great question, Denis.
Yes, I agree with you completely. In fact, I devote an entire chapter starting on page 17 of the book to exactly this subject because it's so critically important to accurate retirement planning. You can view the table of contents for the book here to see what other topics are covered as well.
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The reason this issue is so important is because most conventional retirement planning models fail to account for retirement life expectancy correctly, which can be financially catastrophic.
Most retirement planning models allow you to spend principal because they assume a life expectancy after retirement of less than 30 years. With increasing longevity, that can be financial suicide.
Related: 5 Rookie Financial Planning Mistakes That Cost You Big-Time (and what to do instead!) Explained in 5 Free Video Lessons
Anyone with a mortgage knows how a 15 year amortization includes a lot more principal in each payment than a 30 year amortization. The same is true on a 15 year retirement versus a 30+ year retirement.
As life expectancy grows, the amount of principal that can be spent from savings decreases toward zero.
So if you agree with the increasing longevity premise, it also means you must plan your retirement as a perpetual income stream without spending principal.
The second mistake conventional retirement planning makes is to use actuarial tables to estimate your life expectancy. This practice is flawed for two reasons:
- Actuarial tables are backward looking and don't account for the “age of biology” as you discussed above. By the time you're near death, the life expectancy tables will be very different (longer) than when you retired.
- Your life is not a statistical or actuarial event – your death date can't be planned based on averages. Half of people will live longer than average, and you can't afford to risk being part of that group without having the money to enjoy it.
You really have no choice but to plan for a very long life, unless personal health or genetics dictates otherwise. The risk is too large to assume.
In summary, the age of biology and increasing longevity alone virtually invalidates most conventional retirement planning calculations. It forces you to plan for a perpetual income stream instead of spending principal.
I know that covered a lot of territory in a short blog post, but I wanted to be brief for those that just want an overview of the issues.
I explain everything more carefully and completely with supporting detail in the book How Much Is Enough To Retire? It's a very easy read that others have told me they finished in one night. You can click this link to learn more if you're interested in this subject.
By the way, I'd be remiss if I didn't note in passing that longevity also raises a second issue I consider to be the biggest problem faced by current and future retirees: inflation. The longer you live, the longer our government destroys the purchasing power of your assets through inflation. Always remember, it's not the amount of assets, but their purchasing power that matters.
Our wonderful government changed the monetary rules in the early 1900s by creating the Federal Reserve. We had a stable currency for over 200 years prior to the Federal Reserve, and we destroyed roughly 90% of our currency's purchasing power not once – but twice – since the Federal Reserve was created.
The first 90% destruction took roughly 60 years, and the most recent 90% destruction took less time at roughly 40 years.
Just imagine how different your retirement planning would be if a dollar today would still be worth a dollar when you died, and would continue being worth a dollar for your children and your grandchildren. It would change everything.
It's an amazing thought that's hard to get your head around because we're so accustomed to inflation's erosive effects, but it's a big deal.
Now examine recent government policies aimed at piling on debt by the trillions, along with the entitlement program burdens due for payment between now and 2040. Venture a guess at how long the next 90% destruction takes – or the next – or the next. Can you say “acceleration”?
Combine the destructive effects of accelerating inflation with your life expectancy issue, and you have a whole new ball game in retirement planning.
In short, your retirement will look nothing like your parents or grandparents retirement. Not even close.
Anyway, the book covers all that and a lot more that I can't include in an already-too-long blog post. When you read this book, you'll know more about retirement calculators and planning than most professionals. Plus, you'll have simple solutions to all the problems I discussed here and more.
Additionally, I offer a complete course teaching you how to design a financial freedom plan personally fitted to your unique skills, interests, and resources. It covers everything in the book, and much, much more including how to integrate all three asset classes – business entrepreneurship, direct ownership of real estate, and traditional paper assets – all into your personalized plan for freedom earlier than old.
So yes, Denis, it's all there in the book and the course, and I agree with your concerns about longevity. I think you're on target, and there are even more issues for you to consider to paint a complete retirement planning picture for your future.
I hope this helps.
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