How Life Expectancy Impacts Retirement Projections

Retirement calculators are only as good as the inputs you can provide. They can’t predict the future.

One key input doesn’t get as much thought as it deserves: your life expectancy. Life expectancy tends to be an initial input in calculators. 

This assumption is often entered with little thought as we are eager to get started. Then it tends to get forgotten. However, that assumption significantly impacts retirement projections and can drive suboptimal decisions.

Today I’ll explore an incredibly unsexy topic that we all need to think about: dying. I’ll explore the data behind life expectancy and how we can use this information to create better retirement projections and make better decisions on retirement spending, Social Security claiming, and Roth conversions.

What is life expectancy?

At first glance, this seems like an obvious question. It is how long you are expected to live. However, a look at the data quickly shows that this concept is anything but simple.

At its core life expectancy is a measure of the average number of years you would expect a person to live. This is valuable information if you are an insurance company or the Social Security Administration. 

However, averages are not particularly helpful when planning as an individual or couple. Any individual can live much longer or die much sooner than the average. Beyond this obvious fact, the data we can use to make assumptions is challenging to interpret.

Cohort vs. Current Life Expectancy

According to the CDC website, there are two types of life tables that can be used to help determine life expectancy: the cohort (or generation) life table and the period (or current) life table. They explain:

“The cohort life table presents the mortality experience of a particular birth cohort (for example, all persons born in the year 1900) from birth throughout their lives. The cohort life table is based on age-specific death rates observed throughout the lifetimes of the cohort members and reflects the mortality experiences of an actual population from birth until the final group member has died.” 

This method has obvious limitations. You can’t know the true life expectancy of your cohort until all of the members (including YOU) have died. 

“The period table presents what would happen to a hypothetical cohort if it experienced, throughout its entire life, the mortality conditions of a particular period in time. For example, a period life table for 2018 assumes a hypothetical cohort that is subject throughout its lifetime to the age-specific death rates that occurred in 2018.”

According to an article in the British Medical Journal, “The assumption behind the synthetic cohort requires mortality to be unchanged for about a century, or half a century if remaining LE at age 50 were considered.” The limitation here is the fact that conditions change over time. 

The most prominent recent example is the COVID pandemic which significantly changed the death rate and most common cause of death for a few years. More generally, life expectancies increase as healthcare technology and delivery improve.

Life Expectancy Based on Current Age

The next thing to understand is the general life expectancy of a population vs. your remaining life expectancy based on your current age. Your life expectancy changes over time. This is a statistical truth based on the fact that you haven’t died yet.

For example, life expectancy of an entire population considers deaths attributable to factors including infant mortality, lethal childhood cancers, and genetic diseases that present early in life and shorten life expectancy, all of which by definition you have escaped. They also include things like deaths from automobile accidents caused by reckless driving, homicides, and extreme activities which are all still possible, but less likely, as you age by virtue of generally less exposure to dangerous conditions. These deaths at early ages bring down the average life expectancy of a population.

Most life expectancy calculators ask your current age. The higher your current age, the higher your life expectancy will be because you have already made it this far.

Sex Differences in Life Expectancy

We also have to interpret data related to differences in life expectancy based on sex and race. How do we apply this data to our individual situations?

There seems to be a pretty clear trend across cultures, races, and nations that women live longer than men by about 5-7 years on average. An article from the Harvard Medical School blog lays out possible explanations for this phenomenon. 

My personal takeaway is that women should, all else equal, assume a longer life expectancy than men. This aligns with the Social Security life expectancy calculator’s assumptions.

Race Differences in Life Expectancy

The data related to race and life expectancy is less clear. One COVID era article from KFF explored widening disparities in life expectancy among racial groups. Their data generally showed that while life expectancy shifts over time there are consistent disparities among racial groups.

Asians have the longest life expectancy by a few years. They are followed by Hispanics then Whites who have little difference in life expectancy among these groups. Blacks and Indigenous populations have significantly lower life expectancies than the other groups, with the gaps between groups widening during the pandemic.

It is unclear why this is the case. The article hypothesizes a variety of economic, social, and cultural factors that contribute to these differences. 

Among the 10 leading causes of death, homicide (#7) is present only among Blacks. However, a study from the Violence Policy Center shows that well over a third of homicide victims are under the age of 24, while less than 3% are aged 65 or older. This factor alone could explain a substantial portion of the life expectancy difference when looking at an entire population.

The KFF article also points out that rates of smoking, substance and alcohol use disorders, and obesity are higher in Black and Native American populations. These groups also are more likely to face socioeconomic challenges including being uninsured or underinsured, which could also contribute to lower life expectancy.

This all makes me think that you should not over-interpret the data suggesting some racial groups have shorter life expectancy after considering these factors. If you have reached middle age, are in relatively good health, and are in a strong economic position, I assume your life expectancy is comparable regardless of your race.

Healthy Lifestyle and Life Expectancy

A few years ago I reviewed Dr. Peter Attia’s book Outlive. In it, he focuses on improving “healthspan” (i.e. the time you are functioning at a high level physically, mentally, and emotionally) vs. lifespan. 

There is an assumption that by living a healthier lifestyle you can avoid or delay what Attia calls the “4 Horsemen”: metabolic syndrome, heart disease, cancer, and Alzheimer’s and other neurodegenerative diseases. These conditions either directly cause or contribute to the vast majority of morbidity as we age and ultimately mortality.

There is merit to these ideas. A study published in the Journal of the American Heart Association looked at the impact on life expectancy of 5 lifestyle-related factors: diet, smoking, physical activity, alcohol consumption, and body mass index. They found people that adhered to low-risk behaviors in all 5 of these areas could prolong life expectancy at age 50 years by 14.0 years for females and 12.2 years for males when compared to adults with high risk factors in all 5 of these areas.

That is impressive! Still, some care should be taken to not over-interpret this data. It compares people at two opposite extremes. Average data already includes people at both extremes and many more in the middle. 

A Reasonable Starting Point

The Social Security Administration’s online Life Expectancy Calculator suggests that a current 50 year old male has an additional life expectancy of 32.2 years, or 82.2 total years of life expectancy. A 50 year old female is expected to have greater longevity, 35.6 additional years or 85.6 years of total life expectancy.

This seems like a reasonable baseline expectation. If you are healthier than normal or have a history of exceptional familial longevity, you may want to add a few years to your baseline assumption. Conversely, if you have known health issues you could adjust your baseline expectations downward.

I wouldn’t alter expectations based solely on your ethnic/racial background. The data seems too muddied by socioeconomic factors.

Planning for Longevity Risk

Many people reflexively choose 100 years as their life expectancy. This is the starting point for many people when using retirement calculators. 

We all want to know that we have “enough” and that we won’t run out of money in a worst case scenario of living longer than anticipated (i.e. longevity risk). Your percent chance of success (i.e. not running out of money) is one of the primary outputs offered by almost all retirement calculators.

Related: Defining Retirement Success and Failure

Longevity risk is one real risk we must account for in retirement planning. However, we need to be careful of not anchoring to this assumption of exceptionally long life expectancy. It can lead to skewing future decisions based on this low probability outcome.

Odds of Living to 100

We shouldn’t assume we all will live to 100. Even for the healthiest of us, this is rare.

According to data from the UK Government’s Office of National Statistics life expectancy calculator, a 50-year-old male has about a 10% chance of living to 100. Females are not surprisingly a little more likely to achieve this outcome at 15%

A resource from the Centers for Health Care reports a considerably lower likelihood of living to 100 at 6.5% for women and 3.4% for men in their 60s. Regardless of who you choose to believe, it is safe to say that living to 100 is a losing bet much more often than not.

To this point, I encourage you to return to the KFF study showing the leading causes of death. Accidents are one of the top four causes of death for all racial groups.

Being more healthy and active increases the odds of having a higher quality of life for a longer time. We may shift our cause of death away from chronic disease to something like an accident as we remain active longer or delay the onset of these diseases. But we’re all still going to die! 

Another compelling piece of data from that KFF study is that suicide is one of the top 10 leading causes of death for every racial group except Asians. The American Journal of Geriatric Psychiatry reports an increase in the incidence of depression around the time of retirement. This is a powerful reminder to not neglect our mental health as part of a healthy lifestyle as we age!

Over Emphasizing Longevity When Making Planning Decisions

Is there an issue of assuming that we’ll all live to 100? Isn’t it better to be safe than sorry?

I’ll reiterate. Longevity risk is one real risk in retirement planning. You must prepare for this potential outcome.

However, making decisions based solely on this assumption can lead to decisions that have a low likelihood of working out in your favor. Let’s examine three common areas of retirement planning where this is the case.

Determining Your “Safe” Retirement Spending Rate

One of the most commonly discussed topics in retirement planning circles is safe withdrawal rates. This is an important issue.

Spend too much and you can run out of money. Spending too little means missing out on experiences you could have had if you were willing to spend on them.

Unfortunately, no one can know their safe withdrawal rate with certainty. There are too many unknowable assumptions that impact this calculation.

One thing we do know with certainty is, all else equal, the longer your retirement time horizon the lower your expected safe withdrawal rate. Karsten Jeske explores this in tremendous detail in his Safe Withdrawal Rate Series. 

At a basic level, it is common sense that the more years of spending you need to support, the larger the initial portfolio you need to support a given level of spending. Another way of looking at this is that with a given portfolio, you would need to spend at a lower rate if it needs to last longer.

Basing your decisions on the assumption that you will live to 100 means that you will over-save and/or underspend in the majority of scenarios.

Claiming Social Security

Most high-fidelity retirement calculators and professional financial planning software have tools that help you determine the optimal Social Security claiming strategy. Both the Boldin and Pralana calculators this blog affiliates with have this feature in their tools.

However, as with all retirement calculator outputs, they can only be as good as the inputs you provide. If you only consider the optimal strategy based on living a very long life, you will get wonky results. 

This lightbulb clicked for me when I began using Right Capital’s financial planning software with clients. There is an option to put in an “Optimal Strategy” for claiming Social Security. 

I quickly realized, if you only consider the assumption that you will live to 90 or later the optimal output will always say to claim retirement benefits at 70 years old.

There is a “break even point” where the larger benefit you get by delaying Social Security makes up for the missed smaller payments you didn’t receive if you would have claimed earlier. That point is around age 80. So this output is obvious based on the inputs of living to 90 or longer.

However, if you change the life expectancy assumptions, you can get much different results.

Of course, we don’t know how long we will live. So we can’t know our actual optimal strategy until after we have taken our last breath, or in the case of longevity until after we’ve passed the break-even point, at which point delaying becomes progressively more beneficial. 

However, it is wise to model different strategies and assess the probabilities of what would be optimal in various scenarios. Basing our decisions only on living well beyond reasonable life expectancies can skew Social Security claiming decisions.

Related: A Framework for Claiming Social Security Retirement Benefits

Roth Conversions

Another feature of good high-fidelity retirement calculators is the ability to analyze the impacts of Roth IRA conversions. Both the Boldin and Pralana calculators this blog affiliates with have this feature in their tools as well. Again, you must take care with the inputs you give them if you will use the outputs to guide your decisions.

I recently shared Mike Piper’s talk from last year’s Boglehead’s conference on Roth Conversions. I encourage you to watch the whole talk. I’ll quickly summarize the key points relevant to this conversation.

In the talk, Piper outlined 3 key effects of Roth conversions:

1. Pay tax now instead of later.
2. Use taxable dollars to “buy more” Roth space.
3. Reduce future RMDs.

The second and third effects will allow you to shield invested dollars from the effects of tax drag after the conversion. As a result, the impact on your outcomes can be dramatically different based on the amount of time after the conversions. 

As such, if you only assume that you will live longer than normal life expectancy the outputs will be skewed in favor of a more aggressive strategy for conversions. 

That may work out for you if that assumption is correct. However, it is smarter to base your decisions on a more nuanced analysis. Note how different assumptions change your outputs. Consider the probability of different scenarios and the impact of each to make a more informed decision.

If Roth conversions look reasonable when you have a short life span, they will tend to look really good if you live longer. However, if you would only benefit from Roth conversions if you live to 95 or 100, you should think long and hard about implementing this strategy.

Summing Up

The seemingly simple topic of life expectancy is anything but. Life expectancy is a measure of the average amount of time you can expect to live. But we have to make decisions as individuals who may vary considerably from the average.

There is reasonably strong data suggesting women live longer than men. A healthier lifestyle can improve life expectancy. You probably should factor that into your assumptions.

There is also data suggesting differences in life expectancy among racial groups. However, that data is confounded by cultural and socioeconomic factors, making its usefulness less clear.

One thing we do know with certainty is that living a long healthy life is considered a positive outcome personally, but a challenge from a retirement planning perspective. We need to consider this possibility and plan for longevity risk.

Simultaneously, we need to recognize that the odds of having exceptional longevity (i.e. living beyond your mid-90s) is relatively rare. So take care in putting too much stock in decisions made with assumptions that most likely won’t come to pass.

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[Chris Mamula used principles of traditional retirement planning, combined with creative lifestyle design, to retire from a career as a physical therapist at age 41. After poor experiences with the financial industry early in his professional life, he educated himself on investing and tax planning. After achieving financial independence, Chris began writing about wealth building, DIY investing, financial planning, early retirement, and lifestyle design at Can I Retire Yet? He is also the primary author of the book Choose FI: Your Blueprint to Financial Independence. Chris also does financial planning with individuals and couples at Abundo Wealth, a low-cost, advice-only financial planning firm with the mission of making quality financial advice available to populations for whom it was previously inaccessible. Chris has been featured on MarketWatch, Morningstar, U.S. News & World Report, and Business Insider. He has spoken at events including the Bogleheads and the American Institute of Certified Public Accountants annual conferences. Blog inquiries can be sent to chris@caniretireyet.com. Financial planning inquiries can be sent to chris@abundowealth.com]

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