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Playing the Spread

Jonathan Clements  |  August 13, 2016

HOW LONG WILL you live? A recent study from Boston College’s Center for Retirement Research noted that, “A healthy 65-year old man in an employer pension plan has a 25% chance of dying by age 78, or of living to age 91 or beyond.”

Think about the dilemma this creates if you’re retiring at age 65. Even if you are in the middle 50% of the male population—neither among the 25% who die early in retirement nor among the 25% who live well into their 90s—your retirement could last just 13 years or it could be double that, at 26 years. For women, the middle 50% would likely range from roughly age 80 to 93.

Faced with statistics like this, it’s understandable why folks are reluctant to delay claiming Social Security benefits or to buy immediate annuities that pay lifetime income. We’ve all heard of folks who have lived to 100, or close to it. But we’ve also heard of folks who keel over soon after retiring. What if you were one of those unlucky individuals—and you had also delayed Social Security benefits and used a chunk of your nest egg to buy an income annuity? The thought just isn’t palatable.

The stats also explain why folks are puzzled by the 4% withdrawal rate. The 4% rule suggests you withdraw 4% of your portfolio’s value in the first year of retirement and thereafter increase the annual sum withdrawn with inflation. If you follow that approach, your nest egg should carry you through a 30-year retirement, no matter how rough the markets are or how bad inflation gets. But when your neighbor drops dead at age 73, withdrawing just 4% seems like an abundance of caution.

Tempted to bet on a short retirement? Keep three thoughts in mind. First, the big financial risk isn’t dying early in retirement. At that point, all your money troubles are over. Instead, the big risk is living longer than you ever imagined.

Second, average life expectancies are misleading, because there’s such a disparity among folks with different levels of wealth and education. If you count yourself among those who are affluent, healthy and well educated, there’s a good chance you’ll live three or four years longer than the general population.

Third, if you’re married or in a long-term relationship, you have two tickets to the life expectancy lottery. Even if your ticket turns out to be a dud, there’s a good chance your spouse or partner will live to a ripe old age.

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