Know Your Investment Horizon When You Retire
by Shane Flait, ©2010

New retirees often think they have about 10 years left. So they plan accordingly. But they misperceive their remaining life expectancy. 

To invest properly, you ought to know just how long your portfolio needs to last.  Although you don’t know how long you live, you ought to know the statistics. And that’s what this article is about.

We all know that life expectancy is somewhere around 75. But what does that really mean?

Life expectancy is based on a birth year. The life expectancy for people born in the year 1900 – the turn of the 20^th century – was 53. That means 50% of the people born in 1900 were expected to live beyond 53 while 50% were expected to have died before reaching it. So life expectancy is statistically the ‘50/50’ age that people will live to. 

The life expectancy for a person born in the year 2000 - the turn of the 21^st century – is 77. So 50% of these people will live beyond the year 2077. We can see that life expectancy has increased by about 50% during the 20^th century. Improved medical care and health account for most of this.

Now here’s the rub.

First, these life expectancy values are an average of everyone born in a certain year. But life expectancy has a finer grain variation based on a person’s sex, and socioeconomic status.

For people born in the year 2000, women’s life expectancy is 79.9 while men’s is only 74.  Well-off white collar workers will statistically live longer then poorer blue collar workers. How you are able to control your living style and health clearly has an effect on your life expectancy.  So you’re not destined to kick the bucket at the 75 year mark!

Second – and more amazing – is that the older you get, the further beyond your original life expectancy you’re expected to live! That’s because you’ve survived early death statistics that restricted your original life expectancy based on your birth year.

Insurance statisticians keep track of this extended life expectancy for persons based on their current age. The IRS publishes its own tables on these[1].  As an example their tables say that if you are 65 years old, you’re expected (50/50) to live to 86; if you’re 70 then you’re expected to live to 87; if you’re 75, you’re expected to live to 88.5. You can see that these ‘remaining life expectancies’ are much longer than you may have expected.

All this comes down to the statistical fact that retirees have generally a much longer investment horizon than they think. When you plan out – or re-evaluate- your retirement years, be sure to prepare your living style, portfolio, and withdrawal rates to keep you portfolio robust so it’ll be there as long as you will – statistically!

Of course, each of us is different, and your health situation may make a significant difference. 

 Shane Flait is a writer and educator. Get more info at www.EasyRetirementKnowHow.com