First Person: My Retirement Planning Comes With an ‘Expiration Date’

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Have you ever bought food with an expiration date only to let that date pass and then wonder what to do with it? It could be stale before actually reaching the date; it could be fine until the date hits and then go bad; or it could last much longer than the actual date on the package.

Well, it's kind of the same with humans. We will all have our own personal expiration dates, and trying to choose one that best fits with our personal health and lifestyle can help immensely with retirement planning. While it can be kind of a morbid thing to consider, doing so can also be critical to our financial and retirement planning.

Social Security factors

Developing an expiration date can be critical when it comes to Social Security. Having an idea of longevity can provide a way to begin analyzing benefit estimates and amounts. Having a general idea of how long we might live can help with figuring out whether to start taking benefits early in order to at least recognize something in the way of payments, or to delay taking benefits so that payment amounts are larger down the road and later in life.

I used a good example of this in a recent article I wrote entitled, "Ignore the 'Wait until you're 70' Social Security Advice". In that article I used to following Social Security example to show how combining starting dates with payment amounts and an average life expectancy date can clarify benefit question:

"We'll assume for ease of this example and since it's the number the US News and World Report article used that I'll get $1,000 if I take benefits at 66 (full retirement age). According to article that amount would be $750 if I decided to take benefits at age 62 and $1,320 if I waited until age 70.

According to the CDC, in 2010, the average life expectancy was 78.7 years of age. Let's say I live until 80 for ease of this example.

Not factoring in cost-of-living increases to Social Security benefits, this means I'll receive the following amounts over time:

  • Benefits from age 62 to 80 -- 216 payments (18 years x 12 monthly payments) x $750 = $162,000 in benefits
  • Benefits from age 66 to 80 -- 168 payment (14 years x 12 monthly payments) x $1,000 = $168,000 in benefits
  • Benefits from age 70 to 80 -- 120 payments (10 years x 12 monthly payments) x $1,320 = $158,400 in benefits"

Having a longevity number upon which to base these calculations can help build the numbers out moving forward to have a better idea of benefits when extending a retirement plan timeline.

Building in some cushion

As noted above, the 2010 average life expectancy used by the CDC was 78.7 years. While this is a good starting point for determining how long we might live, other more personal variables can come into play. Things like lifestyle, diet, family history, and even living location among other things can affect how long a person lives.

Personally, I like age 85 as an expiration date for myself; however, there is a history of longevity in my family. Therefore, while I put my life expectancy somewhere between ages 80 and 90, I use age 90 for my financial planning since it adds in some cushion just in case in live longer and will hopefully help me avoid outliving my money.

Creating a drawdown plan

With age 90 being used as my expiration date, this helps me with my asset allocation for retirement as well as my drawdown plan. Having an idea of what I will expire can help me figure out how much of my assets I can safely pull each year without overdoing it and ending up penniless. While nothing is guaranteed in life, knowing that if I retire at age 65, I'll likely have 25 years for my assets to cover until I pass will help me divide up my assets, knowing what percentage I can utilize each year until 90 while also keeping a reserve on hand in the event of living longer.

In these ways, selecting an expiration date can be extremely useful in preparing for retirement and figuring out how to get there in a financially sound way.

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The author is not a licensed financial professional. The information provided in this article is for informational purposes only and does not constitute advice of any kind. Calculations have not been verified by a professional. Any action taken by the reader due to the information provided in this article is solely at the reader's discretion.


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