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Life Expectancy and Retirement Assets

Many Americans are familiar with the life expectancy data published annually by the government's National Center for Health Statistics (NCHS). The latest NCHS "life tables," based on mortality experience for 2002, show that a newborn baby boy can expect to live to age 74½, while a newborn baby girl can expect to live to 79.9. (Both of those figures are quite conservative because they assume no future decline in mortality rates.) But life expectancy at birth is not particularly relevant for retirees. They have already survived to retirement age, by definition, and are very likely to survive to considerably higher ages.

People need to have some realistic sense of how much longer they are likely to live when they begin drawing down their assets in retirement. If they use up their assets too quickly, they may run out of money before they need it the most, to pay for increasing healthcare costs and other expenses associated with truly advanced age. On the other hand, if they draw down their assets too slowly, they may have insufficient income to maintain their pre–retirement quality of life. The first problem, using up assets too quickly, is far more common, primarily because people greatly underestimate their remaining life expectancy.

While the concept of retirement is becoming increasingly imprecise as significant numbers of people move back and forth between being employed (full–time or part–time) and being retired. That figure has been rising very slowly in recent years after a long period of steady declines. It may rise even more in the future as the 77 million baby boomers begin leaving the labor force in large numbers, or as employers, facing labor shortages, try to retain workers longer. Age 61, however, seems to be a reasonable starting point for estimating future life expectancy.

According to the 2002 NCHS tables, a 61–year–old man can expect to live another 19.4 years, to age 80.4, while a 61–year–old woman can expect to live to age 83.7. And those figures are just averages. Many retirees will live much longer. People who plan to use up their retirement assets at a rate appropriate for those averages have about a 50% chance of using their assets too quickly and running out of money. Nobody should knowingly expose himself or herself to such a high level of risk.

Suppose that a 61–year–old retiree wants to reduce his or her risk of running out of money to less than 10 percent — arguably still a rather high level, all things considered. A man would need to plan to live to age 93, because the probability of doing that is 9.1 percent. Similarly, a woman would need to plan to live to age 96, for which the probability is 9.6 percent. If these ages seem high, it may be because so many people are underestimating their potential longevity.

Suppose the two 61–year–olds in the above examples are married to each other and want to know the probability that at least one of them will reach age 100. If we assume that their mortality experience is independent of each other (not really true, but close enough as an approximation), that probability is also surprisingly high: 4.5 percent — and that's without any assumed mortality improvement over the next 40 years!

Very few people have sufficient retirement assets to draw down slowly enough to last 30 or even 40 years and still maintain their pre–retirement lifestyle (or anything close to it). And those who do so are much more likely than not to die sooner, leaving behind a lot of money that they were never personally able to use — another undesirable result.

A possible solution to this dilemma is to purchase a guaranteed* lifetime income product, such as New York Life's Lifetime Income Annuity, which allows for the pooling of longevity risk among all of the people who buy such a product from an insurance company. When retirement assets are pooled, the people who die sooner stop drawing from the pool at death, leaving money in the pool for those who die later. Moreover, many guaranteed lifetime income products are sold with guaranteed–payment periods and refund features so that buyers do not have to put all of their assets at risk. And outliving your assets maybe impossible if you have an annuity. Most retirees are concerned about risk, which guaranteed lifetime income products can potentially eliminate.

*Guarantees are dependent on the claims paying ability of the issuing insurer.

The Lifetime Income Annuity is issued by New York Life Insurance and Annuity Corporation (A Delaware Corporation), a wholly owned subsidiary of New York Life Insurance Company. In jurisdictions where the Changing Needs Option is not approved, the issuer is New York Life Insurance Company.

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Life Expectancy and Retirement Assets

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