Lake Wobegon Principle Key to Retirement Security

Last Updated Jun 20, 2010 1:33 PM EDT

Even if you're not an ardent card-carrying member of Lake Wobegon nation you're no doubt familiar with Garrison Keillor's classic description of his fictional small town:
"All the women are strong, all the men are good looking, and all the children are above average."
That last bit is also the key to a secure retirement. Channel the Lake Wobegon effect by planning on an above-average life span and you'll greatly increase the odds that your retirement will indeed by comfortable.

Average is Risky
How long you will live is obviously a key variable in figuring out how much money you'll need to support a comfortable retirement. Ten years, 20 years, or, gulp, 30 years?

Who knows? is of course the only answer that we can make with a high degree of certitude. But that's not going to help with the retirement planning. So we're left to come up with some rational estimate or benchmark to plug into our planning. That's where the concept of Average Life Expectancy enters the picture. You know, the oft-cited statistics telling us that a 65-year-old today has an average life expectancy into the mid 80s.

But here's where you need to be very careful. Average Life Expectancy is not saying a 65 year old today will live to 84-86 and drop dead. As my MoneyWatch colleague Steve Vernon explained, it's the age at which there is a 50-50 chance you'll still be alive. And if you are, you'll want to be planning on hanging around for at least a few more years. Consider that folks in their mid 80s today have an average life expectancy of another five to seven years. Among those that make it into their early 90s, the average life expectancy is another three to four years.

The Cost of Being Above Average
Unless you're absolutely, positively, sure you're not destined for a very long life, applying the Lake Wobegon principle and setting your retirement plan on an "above average" life expectancy seems like the safest and sanest move. And that of course means having more set aside at age 65.

In a recent post, I reported that benefits consulting firm Hewitt Associates says on average we will need retirement savings/income equal to 15.7x our final year salary to live comfortably.

That 15.7x is based on average life expectancy.

Hewitt also ran the numbers for a 65-year old today who has an above-average life span. For a 65-year old today who falls into the 80th percentile (not the 50th) you'll need 20.3x your final year's salary to ensure a comfortable retirement. Social Security and other income sources might finance 5x or so, but the rest would be on your shoulders. "Not everybody fits into the base case [average] model," says Byron Beebe, head of Hewitt's U.S. retirement group. "I think it's good for people when doing planning to run some different scenarios."