Good Health: A Retirement Security Risk?

(MoneyWatch)  Star Trek's Spock wasn't exactly attuned to retirement planning when he came up with the Vulcan salutation "Live Long and Prosper." For one of the biggest risks to your retirement security is the very fact you may well indeed live a very long time, raising the threat that your nest egg will run out before you do.

The Numbers According to the actuarial bean counters at the Social Security Administration, a 40-year old male (in 2005) had a life expectancy to 77 years old and a 40-year old female to 81.5. What's often lost in those numbers is that they are merely the average; you in fact have a 50 percent chance of living longer than that. And it's not as if once you make it to 75 or so you're expected to keel over in short order. A 75-year-old male in 2005 had an average life expectancy of 10 years; 75-year old women on average will be around another 12 years. Older begets older.

Now I realize there's also the prospect that you could fall into the 50 percent that doesn't make it to 77/81. But unless you have a family history or current illness that raises the likelihood you won't live that long, it seems prudent to plan on sticking around for a looong time. What should keep you up at night is not that you might die, it's the possibility that you might live a long time, and what that means to your retirement security. (Full disclosure: its got my full attention given that my grandmother lived -- and lived well -- to the age of 102.)

Longevity risk is what keeps plenty of financial advisors busy. Harold Evensky, founder of Evensky & Katz Wealth Management in Coral Gables, Fl., says clients are forever insisting that they don't plan on living into their 80s and 90s. "I tell them 'Make my day.' I'd feel bad if they died at a younger age, but I'd be glad we don't have to deal with making their money last longer."

Calculate Wisely
I was glad to see T. Rowe Price's retirement calculator get high marks in MoneyWatch's recent Retirement Calculator-Off . It bakes in an assumed life expectancy to 95 without allowing the user to manipulate the number. Overkill? Perhaps. But if there's one clear takeaway from the recent financial meltdown, smart planning is not just about playing the probabilities but accounting for the possibility of outlier events. If you "only" live to 77, well that just means more for your heirs. But if your planning took into account the possibility that you'd be around for a while, then you (and your grown kids) won't have to worry about the money running out if you do end up being an outlier and live well beyond your current life expectancy. That's how you live long, and prosper.

Image of Spock via Flickr user Greencolander, CC 2.0