A Long Life Is Expensive

(MoneyWatch)  In 1900, life expectancy in the United States was 49. No wonder people didn't do much retirement planning back then. Today, it's almost 78, and it's projected to steadily increase over the next 50 years.

What these life expectancy numbers mean is that if you want to retire at 65, you need to plan on at least a 20 to 30 year period of supporting yourself from the return on your investments. That's expensive, and you'll likely need to take some financial risks to do it.

Many people misinterpret the life expectancy numbers. They see 78 and think, "well, I've only got to plan on 10 to 15 years." But 78 is the life expectancy of someone on the date of their birth. For each year you live, you actually have a longer life expectancy.

So if you reach 65, your life expectancy is about 19 years, or out to age 84, according to the Center for Disease Control statistics. This basically means you have a 50/50 chance of living 19 years or more.

And if you make it to 75, then your life expectancy is another 12 years, or out to age 87. At that point, there's a 50/50 chance you'll live beyond 87.

And if you're married, your joint life expectancy is even higher. Moreover, if you have some financial resources and have been taking care of yourself, your odds go up again. When you put it all together, you've go to be thinking of a range of 20 to 30 years for your retirement money.

With that sort of time frame, you'll need your money to grow even when you retire. Here's a little illustration:

• When you retire, a conservative estimate of how much you can distribute from your investment holdings is 4 percent per year, adjusted for inflation going forward. That means if you have $1,000,000, you would take out $40,000 the first year. If inflation is 3 percent next year, you take out $41,200, and so on each year.
• If you did this for 30 years, your distribution would grow from $40,000 to about $94,000. And your total distributions over those 30 years would be about $1,900,000, or almost twice what you started with.

That's why retirees still need growth in their accounts as they age. You have to take some risks, but if you manage them prudently, the odds are in your favor that your accounts will grow as you age, while still delivering income each year.

Bottom line. From a financial standpoint, dying young isn't a problem. It's living a long life that's the challenge. One thing you don't want to do is underestimate how long you might live and how much you might need.

Photo from Flickr, courtesy of mcohen.chromiste, CC 2.0