Last Updated Mar 18, 2010 11:28 AM EDT

"It's very dangerous to use your average life expectancy when planning for retirement, since there's a 50% chance you'll live beyond this estimate."

After my post How Long Do You Have to Live? went live last month, I received this comment in an email from Dallas Salisbury, president of the prestigious Employee Benefit Research Institute. I totally agree--longevity risk is a serious issue that needs careful planning.

To understand his point, let's take a look at an example. Suppose you're a 65-year-old man who uses the life expectancies in my prior post to plan a drawdown strategy for your 401(k) balances. You'd see from the post that your average life expectancy is 18 years, for an average age at death of 83. Suppose you then decide you can draw down your 401(k) balance so that it will be exhausted after 18 years. This would be a bad move, since there's a 50-50 chance you'll live beyond those 18 years. In fact, there's a 25-percent chance (one out of four) that you'll live five years beyond your life expectancy to age 88, and a 5-percent chance (one out of twenty) that you'll live 12 years beyond your life expectancy to age 95.

The life expectancies I described in my earlier post combine the numbers for both healthy and unhealthy people. If you get moderate exercise, keep your weight at healthy levels, and don't smoke or abuse alcohol, you've dramatically increased your odds of living longer than the average life expectancy. And you need to plan for that.

Let's look further at the numbers. Suppose you're a 65-year-old woman. Your average life expectancy is 21 years, for an average age at death of 86. But there's a 25-percent chance that you'll live five years beyond your life expectancy to age 91, and a 5-percent chance that you'll live 13 years beyond your life expectancy to age 99.

One more example: Suppose you're a 65-year-old man with a 62-year-old spouse. Given the odds, there's a 50-50 chance at least one of you will live for an additional 26 years. If either of you is healthy, chances are good you'll beat the averages. For example, there's a 25-percent chance your money needs to last 30 years, and a 5-percent chance your money needs to last 37 years. Now that's longevity risk!

The bottom line? When planning a drawdown strategy for your 401(k) balances, I recommend you plan for at least the 25-percent likelihoods mentioned above, and maybe even the 5-percent likelihoods, particularly if you take care of your health.

Many retirement planning software programs ask you to input how long you expect to live. I suggest that you use a life expectancy calculator which takes into account your lifestyle and family history, such as the calculators at www.bluezones.com or www.livingto100.com. Then, I'd add five to ten years to the resulting life expectancy, just to be sure you won't outlive your money. In this case, it's better to plan for the best case scenario than the worst!

Another thing to remember is that it takes a boatload of money to be retired for so long. This is one of many reasons I encourage you to do the math to see how much money you need to retire, and consider working in your "early" retirement years. You don't want to live it up in your sixties and seventies, and then be forced to look for work in your eighties! Making smart decisions now will help you enjoy all your retirement years.

Image from iStockphoto contributor sjlocke
• Steve Vernon

View all articles by Steve Vernon on CBS MoneyWatch»
Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.