The Game of Life

When you were a child, did you ever play a popular board game called The Game of Life? It simulates a person traveling through life, from childhood through retirement. As players navigate education, careers, and maybe a family along the way, they’re offered chances of risk, reward, and unexpected opportunity. It’s fun to see where certain decisions—and risks—might take you in the game. After all, at the end of the day, the consequences get folded up with the game board. Interestingly, in an early version of the game, players had to navigate from the first space “Infancy,” attempting to move through as many of the squares offering rewards, to the last space, “Happy Old Age.” Once there, they could earn additional points.

Sometimes real life feels like a game of chance, with risk, reward, and unexpected events. Getting to a happy old age doesn’t always figure into the decisions made along life’s journey. But, that doesn’t mean people need to live like it’s a gamble, playing the odds and figuring things out when they happen. There is a way to plan smartly for retirement and beyond.

Average Life Expectancy

Thanks to many of you who are providing great healthcare, the average life expectancy of most Americans today is high, by historical standards, and is getting even higher as the years go by. Statistics show people are living longer, but how much longer is a question not easy to answer. Life expectancy statistics based on the population at large are expressed as averages, with a 50% probability that people will die sometime before life expectancy and half sometime after.

From an actuarial standpoint, there are generally two methods for calculating life expectancy: Periodic Life Table or Cohort Life Table. These are based on averages for a particular age group, calculated from birth. The periodic method represents mortality rates during a specific time period of a population. The cohort method represents the overall mortality rates over a population’s entire lifetime. If a person survived to the average expected life span calculated for a given population, there is a dwindling probability they would live beyond that. In other words, according to the actuaries, the longer you live, the longer you are expected to live.

According to the Social Security Administration life expectancy calculator, a 65-year-old man has a life expectancy of 84.2. At age 66, he has a life expectancy of 84.5, and at 70, 85.7. Women, of course, have a longer life expectancy. A 65-year-old woman has a life expectancy of 86.7, and by the time she reaches age 70, it grows to 87.8. As planners, we believe this is far too much generalization for a custom plan.

The Longevity of an Individual

The law of averages goes out the window when dealing with small sample sizes. At D. Scott Neal, Inc. we use the age of 100 as our default age, also referred to as a “date certain,” when calculating the impact of longevity on financial planning. It’s hard for some to believe they could live so long. We often test the effect of shorter lifespans. Alternatively, we are often asked to increase spending to see when money is likely to run out.

In the planning process, we like for our clients to use the Gosset Wharton calculator developed in the Wharton Business School at the University of Pennsylvania. Accounting for many different data factors, including current age, health, and lifestyle characteristics, the calculator yields an individual’s life expectancy. It also provides upper (25th percentile), median, and lower (75th percentile) age points, along with the likelihood that an individual will die before the lower age or live beyond the upper age point. If you would like to calculate yours, simply do a search for “Wharton longevity calculator.” Another popular calculator among financial planners is found at www.livingto100.com.

It is important to note that an estimated life expectancy can change over time, given a change in habits and lifestyle choices. Healthier habits can increase longevity. Over the past 18 months, according to Wharton’s calculator, I have seen my own life expectancy go up by nearly 6 years. About the only things that changed during that timeframe were a daily exercise routine and medical technology. The opposite can also be true, of course. Health issues or other mitigating factors that might affect future health can, and should, influence the planning process.

The continued costs of healthcare, including hospitalization and long-term care needs, can change the game in retirement. In the real game of life, younger retirees and many seniors still live active lives, continuing to work, volunteer, or care for family members. It’s not only that the decisions we each make along life’s journey affect the end game for ourselves, but the things we do might also affect someone else’s “happy old age.” Many of the baby boomer generation are balancing caregiving with ongoing careers, raising children, and other meaningful pursuits.

The continued cost of healthcare, including hospitalization and long-term care needs, can change the game in retirement. In the real game of life, younger retirees and many seniors still live active lives, continuing to work, volunteer, or care for family members.

Planning for retirement is an individualized process and requires not only examining the reality of current needs and future possibility, but also thinking about what makes life enjoyable. I recall a professional acquaintance telling about his wife’s grandmother who, through wise planning and the help and support of a loving family, was able to live to spoil her great-great-grandchildren. The last I heard she is crowding 95 with no sign of slowing down. No one can predict exactly how long they will live. Chances are, though, that the “happy old age” square could be the beginning of a whole new round. Are you ready?

Scott Neal, a CPA and CFP, is the president of D. Scott Neal, Inc., a fee-only financial planning and investment advisory firm with offices in Lexington and Louisville. Subscribe to his blog at www.dscottneal.com and receive a free e-book, How to Get a Handle on Cash Flow Once and For All.