How long will I need to fund retirement?

One of the first issues a retirement planner has to deal with is answering the question, "How long will I need to fund my retirement?"

Of course the answer to this question is, "As long as you live." And how long will you live? Although most of us don't know the answer to that question, insurance companies are very aware of the distribution of longevity of the overall population. We can use that information to help define the probabilities that we live for X years longer.

If you have no significant others, heirs, or dependents, you can estimate the length of time you need to fund retirement using uniform lifetime tables like those available in Chapter 1 Section 3 (Annuities):
http://www.golio.net/Chapter1.html

Some longevity calculators use perturbation analysis to estimate how personal habits and diet impact longevity. There are several links to various types of longevity calculators under Section 1.3 at the url:
http://www.golio.net/Chapter1.html

Knowing how much longer the average person your age will live is better knowledge than nothing, but there are still important problems that knowledge does not address.

1) You don't care about the average person, you care about you. Although the average 50 year old will live another 33.7 years, ten percent of them will live another 47.3 years. If you planned to retire at age 50 and fund only 33.7 years, you could get really hungry and uncomfortable during the next 10 or 20 years. Being one of the fortunate people who live long lives could seem like something other than a blessing if you didn’t plan for it.

2) If you want to plan for your spouse or other dependents, you are more concerned with joint life expectancy. On average, a 50 year old will live for 33.7 years, but if there are two 50 year olds, on average at least one of them will live another 40.4 years. If you plan your and your spouse's retirement based on uniform lifetime expectancies, make sure you die first. The last 6 or 7 years could get uncomfortable for the survivor.

The best link I have found to look at joint life expectancy is the Vanguard Joint Life Expectancy Calculator. You can find a link to it under Section 1.3 of the url:
http://www.golio.net/Chapter3.html

This calculator gives you probabilities that two people of same or different ages live X years longer. For retirement planning purposes, this is pretty useful.

You can get the official government joint and last survivor tables from a few places online. These tables are necessarily very long. You have to scroll through a lot of pages to find the one that has both you and your joint survivor’s ages in a top row and 1st column. Also, this tells you the 50% probability only. As mentioned, for retirement planning, you might want to plan for better than the 50 percentile problem.
IRS publication 590 includes a joint and last survivor table in Appendix C, Table II. For the IRS form, this table is not used unless spouses are separated by more than 10 years of age, but the data you are interested in is available in the table. The same government table that covers joint life expectations for ages 0 to 115 can also be found in the document available in Chapter 1 Section 1 (Publication 590 IRAs):
http://www.golio.net/Chapter1.html

The joint life tables start on page 104 of that document and continue to the top of page 126. To use any of these tables you need to find your age along the top row and your joint survivor’s age along column 1. The number in the intersection is the life expectancy from the present (ie. one of you is likely to live that many more years).

Use of the longevity tables described above helps provide guidance regarding the length of time your retirement plan should target.

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