Increased Longevity

If your favorite motto is "play hard, die young, and leave a good looking corpse," you probably won't care that most other people can look forward to an average life expectancy of over 78 years. You probably aren't staying up late worrying about the importance of retirement planning either.

For the rest of us, statistical evidence shows that we can expect to live a reasonably long life, well past the point when most people traditionally retire. This is a mixed blessing. On the one hand, living a long life is generally perceived as a good thing. On the other hand, living longer without the means to support yourself financially is a frightening concept.

How much time exactly do you have left? Nobody can say for sure, but there are a number of ways to provide a rough estimate. The easiest way is for you to take a moment to consider your own family's history. For example, your family as a whole may be particularly long-lived, with most of its members living to their 80s.

A more scientific way to estimate your life expectancy is to consult a life expectancy table. The information in the table is put together by actuaries who take available demographic data, crunch the numbers, and provide the statistical averages for each age group. Insurance companies, banks and the government then use this information to figure out how much time they have left to get money out of you.

Planning Tools The IRS periodically issues Publication 590, which includes a life expectancy table. Take a look at the most recent table, and find out where you come out.

In terms of your retirement planning, knowing how long you will live will help you determine what course of action you need to take. If you somehow knew that you were going to pass away in your younger years, there wouldn't be much point to saving for retirement, would there? The problem is that you usually can't know for sure how long you've got left. The only thing you can be certain of is that chances are very high that you may have to support yourself for at least 20 years after your planned retirement. Recognize this fact and structure your retirement plan to create enough wealth to carry you through your remaining years.

Example Alexandra is a 65 year-old widow and in good health. Although she regularly encouraged her deceased husband to contribute to his employer-sponsored retirement fund, he stubbornly refused. Since becoming a widow at 60, Alexandra has rejoined the work force full-time, contributes to a retirement fund, and has managed to save some money. She would like to retire, but she is beginning to wonder if she has enough money to do so. According to the IRS life expectancy table, Alexandra will probably live another 20+ years. Unfortunately, she figures out that, in order to stretch her retirement resources for 20 years, her current monthly income will be cut in half after she retires. Given the time frame involved, her available options are extremely limited. She can postpone retirement, retire with a drastically limited income and no provision for living longer or for an emergency, or retire and continue working part-time. None of these options are particularly appealing to her. Meanwhile, Alexandra's 40 year-old daughter, Ellen, is concerned by her mother's plight and vows to avoid the same fate. Ellen would also like to retire at 65 and starts some serious retirement planning. Unlike her mother, though, Ellen has 25 years in which to provide the income she needs (plus a cushion) for the approximately 20 years she is expected to live after retiring at 65.