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Episode #581 - What life expectancy should I use in my retirement plan?

Roger Whitney: According to the CDC, the average life expectancy in the United States for a female is 80.2 years. For a male, it's 74.8. So the question before the house is what life expectancy should you use in your retirement plan? We're going to answer that and more on today's show. Welcome to the show. Roger Whitney here. Sometimes you just gotta laugh at yourself, which I am doing right now.

We have a change happening to our Six Shot Saturday email

Before we get to the main topics, I got an announcement. We have a change happening to our Six Shot Saturday email. Well, two changes, actually. Number one is we are changing the name to The Noodle. So if you are currently receiving our weekly email every Saturday morning, you're gonna see something different because it's called The Noodle rather than Six Shot Saturday. If you are not receiving The Noodle, you should. It's a great supplement and standalone newsletter that comes every Saturday morning where we share links about topics that we talk about on the show as well as other things that we think are helpful in creating a great life in retirement. So if you're not signed up for it, join thousands of others by going to thenoodle.me and subscribing. The second change related to The Noodle is we're going to up the things that we share. We have found that at times it's helpful to have some graphics to bring home a point that we talk about. So we're going to share videos from time to time related to the topic that we're talking about. As an example in this coming week's email of The Noodle, I'm going to have a quick video of me going through some longevity statistics using a retirement planning tool so you can get a better appreciation on the topic that we're talking about. So if you're not signed up for The Noodle, go to thenoodle.me and join the conversation. With that said, let's get going with today's topic.

A question from a listener prompted today's topic on retirement planning

A question from a listener prompted today's topic and it reminded me of something that I tried to battle and that is something called the curse of knowledge. So the curse of knowledge is a cognitive bias where someone with a specialized knowledge and a domain assumes that others share the same understanding and that can make it difficult for them to communicate effectively. And for me, that domain is retirement planning. I can get a little geeky. I intentionally try not to get geeky, but I'm in my own bubble. I don't know what geeky is and what it isn't relative to you. Now, there are times you just have to get geeky, which is important. But if you're like most people, you're thinking about retirement planning because you're facing a decision or you're in retirement and you just want to create a great life and retirement planning is the means to an end. You don't want to get too geeky. You just want answers so you can get clarity, so you can make decisions with confidence. And it's easy to forget that because as we go down ACA rabbit holes or Roth conversion rabbit holes or tax policy. All these geeky topics from people that are really into this stuff, including me. But I care about you creating a great retirement. And I got to fight the curse, of knowledge. DS reminded me of that in his question that he sent in. He says, hey Roger, love the show, but seems like the biggest variable that is life expectancy doesn't come up much. I understand it's somewhat unknowable, but with the average life expectancy in the 70s and retirement planning assumptions tending towards 90 and 100, it seems like there's a big gap there to be addressed. Thanks, ds. You're exactly right. And let's address that. Let's address that in a clear and concise way and then go peel the onion back a little bit to understand the context. So first, life expectancy in the 70s, I quoted the CDC statistics. 74.8 years for a male, 80.2 years for a male. The first thing DS that we need to understand is that is assuming like someone's born today and then over time, every year, every day that you age, your life expectancy actually increases because you've gone another year of not getting hit by a car or getting a disease, et cetera. So your life expectancy actually goes up the older you get. So we don't want to use generalized data. That's number one. Number two is we have to be very careful in the age that we use because the consequence of being wrong is asymmetric to the downside. If you underestimate how long you live. So let's think about this. If you are 60 years old and you assume that you live to 80, which is above average life expectancy for a male, then that's going to have certain demands on your money from 60 to 80, that 20 year time frame, it's going to be a lot easier to plan that way than assume you live to 90 because inflation won't have as big a factor. You won't be demanding as much on your resource or, you'll be demanding more on your resources. If you're going to live longer, so the age matters. And if you undershoot the Runway, you could find yourself at a pickle later in life. So there's that acknowledgement of hey, we don't want to miss the Runway and be short. But let's get more practical.

For a 65 year old male today, their life expectancy is 84 and a female is 87

Let's talk about base life expectancy data. Let's not use the normal data like the CDC provides us. Let's use the Social Security Administration life expectancy calculator, which you will have a link to that in the show. For a 65 year old male today, their life expectancy is 84 and a female is 87. So if you're 65 and you've won the lottery because you haven't died prior to then, your life expectancy is longer than the normal average. So 84 for a male, 87 for a female, is that the right number to use now rather than something in the 70s? DS no, it's not. And here's the reason why is that's the average life expectancy and that means that half of the people lived longer, longer than that average. So for a male 84 years, half of the males lived longer than 84 if they were 65. And so this data is much more nuanced than just simply the average. None of us are actually average. And so now we have this 84 for a male, 87 for a female. But that doesn't take everything else into account. DS we have to think about where are we relative to society because these are societal us, societal members. We have to take into account our health, our lifestyle, our family history, our race, our medical conditions, chronic illness like diabetes or heart disease, those shorten life expectancy. If we exercise every day, that increases life expectancy. If we smoke or we don't smoke, that has a significant effect on life expectancy, our access to health care. All of these things come into play because you're not average depending on a variety of these factors. So we can't just use something in the 70s as a male and we can't use 84 as a male because if you live healthy, you have access to healthcare, you don't smoke, you don't drink, you're going to start skewing to being on the high end of that number. And there are a number of longevity calculators that can help you dial that in a little bit more. I'm going to do one right here. I'll do it right now. I'm on a life expectancy calculator. I'll have A link to three or four different life expectancy calculators. Some more in depth, some not. But we'll do this one. I'm just going to do it right here and talk you through it. So it's asking me a question. I am a male. I am a non smoker. I'm, 58. I'm 5'11 I weigh 205 pounds. My blood pressure is normal. It's actually low. My cholesterol is normal. Do you exercise? Yes, I exercise daily. How much alcohol do you consume a week? Oh, this is, three to four times a week. How many driver violations have you had in the last year? None. And it's saying that my life expectancy is 91. Now, just for kicks, let's assume I change one variable that I entered and say that I'm a smoker. Everything else I'll keep exactly the same. And it says my life expectancy is 85. Now. Life expectancy, 85. We got to remember, DS, that still means half of us live longer than that number. Not that I'm going to get at 85. And we're trying to do long term planning, making sure we're still okay later in life. You get the gist of this. I will have a link to a number of calculators. I'll also do a short video using, couples to get an idea of, okay, what's the odds of both of us or one of us being alive at 90 or 95? So you can get some visuals around this as well. So you'll get that in the noodle on Saturday. What do I use in my planning? I use as a base assumption, 92 for a male, 94 for a female. Now some people get concerned about, hey, I got a lot of longevity in my family. I generally do not increase those numbers. I will test for living longer than normal. When I stress test the plan, I generally do not change that default. I have changed the default to lower when there are significant physical attributes that have impaired someone's life expectancy. And that can get tricky. Had a, wonderful man, Tom, who had significant cardiac conditions all through his 60s and 70s. And he was determined to spend all his money before he passed. And he was saying, I'm not going to live past 82. And it was like trying to land a plane on an aircraft carrier. We don't know, we don't want to undershoot. Tom could be the outlier that goes way farther. And it became a little bit of a dance. But that was, you, know. And he had lots of meetings with his doctors to continually reassess. So you can get a little, a little too cute for this. But I think for a base plan of record, it's okay to use 92 for a male, 94 for a female, and then be thoughtful about adjusting. Really only the downside if there's really some significant impairment from a life perspective. So we'll have links to a lot of longevity calculators. I'll have a little video of me going through some statistics around that to give you a context. But I don't think we need to make it more complicated than that. But that's why we don't use those normal ones DS so hopefully that gives you some perspective.

Thrift savings plans will allow Roth conversion starting in 2026

Now it's time to get to your questions. If you have a question that you'd like answered on the show, you can go to askroger.me and type in your question or leave an audio question. Our first question is not a question but just in the news moment that Aaron on our team shared me shared with me. Thrift savings plans unveiled that Roth transfer option will be available in 2026. So if you work for the federal government and you have a thrift savings plan for service members or civilian employees starting in 2026, they will allow a Roth conversion option within that plan. We'll share an article to this in our noodle email this coming Saturday. So for those of you that are federal employees, I know you're under a lot of stress right now, understandably so. But if you are planning for your TSP, you will have this option available starting in 2026.

You should have at retirement about a six month emergency fund or contingency plan

So our first question comes from Karen related to retirement allocations, although we call the pie cake concept and we have a glossary at rogerwhitney.com if you want to check that out. Karen says I have a few questions during retirement, what is the purpose of a 6 months expense emergency fund? If you already put away 5 years of expenses in safe investment vehicles, can you provide a real life example of what it would be used for? I'm asking someone who has kept six months emergency fund. It seems like overkill if I already have five years of my life pre funded. It's a good question Karen. And so for everybody else at a default we say you should have at retirement about a six month emergency fund or contingency plan or contingency fund and then the next five years of your expected spending that's not covered by income pre funded with safe investments, typically treasury bonds that mature when you need to spend the money. Since you don't have the income to cover it. That's like a payroll reserve. So Karen wants to know why have 6 months emergency fund if I already have all this other liquidity? Well, Karen, every, every situation is different. There's nothing magical to six months. You can definitely dial that up or down based on your judgment for your situation. The reason we have that target is when we are planning for retirement. It's a theoretical exercise. Usually someone is still working and they've never actually lived in retirement. They don't know what the rhythm of their life is going to be and what things will come in to their life or out of their life. So since we don't know what their actual spending will be, it's good to have some buffer for bad estimates. And this is true even for someone that is a very detailed budgeter during their accumulation phase while they're working. So they have great data, let's say, but it's data based on working and accumulating and that lifestyle. They don't know what it's like to live in retirement without a paycheck and with a lot of free time and ready to hit the playground in whatever their jam is. So that's still a theoretical exercise even if they have great numbers. So having a contingency fund is helpful for bad estimates because life changes a lot. Usually in the first two or three years in retirement. The goals that were in there, the priorities of those goals, there is a lot of fluidity to those early in retirement. So that's a good reason to have a contingency fund. Another reason is spending shocks. They can be good or bad. They can be. I decided I want to help my son or daughter buy a home. I have an air conditioning. I realize that if I'm going to relocate in retirement that I got to fix this. That and the other thing to market my house, I have a health care expense. They can be good or bad. So it gives some buffer for just spending shocks. That doesn't sacrifice the pre funded amounts that are there to Pay for your 2 year, 3 year, 4 year, 5. So that's the reason to have contingency. Doesn't have to be six months. Generally the six months is the default. And then the more comfortable and accurate you feel with your estimates, you can lower that down or the less visibility you have on what your actual spending will be, maybe you ramp that up a little bit.

Second question that Karen has. Do you have suggestions for saving vehicles for five years expenses that are not U.S. treasury bonds?

Not to get political but it is the fact that the government employees are being cut drastically. As someone who has called treasurydirect for months to get someone on the phone to unlock my account, I am extremely hesitant to keep my money where I may not possibly be able to get to it because I can't get a hold of anybody. It's a great question. Simple answer to that, Karen. They don't have to be Treasury Bonds. Number one, you could use CDs. The key attributes for these five year of pre funded life are that you get return of your money on a specific date so you have clarity of when the money is going to come back, that's not at risk to markets, etc. And number two, then you want to earn interest on that money and be a good steward of it. I think you can still use Treasuries, Karen. Just don't buy them through Treasury Direct. You can actually buy treasury bills and bonds in any brokerage firm that I'm aware of at Charles Schwab or at Fidelity or any of the other major wirehouses. You don't have to use treasurydirect. I have a treasurydirect account, Karen. It's a pain in the butt to log into. It's clunky. I mean it's a government website. It's just not made for consumers. They're not as incentivized to do that. So you can just use a Fidelity account or a Schwab account and buy a Treasury bond. Very simple to do. And maybe I'll create a video on how to do that. I know we've done that in the club Karen, so you might check that. You said you were a club member but you don't have to do that on Treasury Direct. And then those bonds that you buy in your Fidelity or Schwab account you can buy and sell just like you would any other bond. So you can avoid that hassle, which I totally understand and agree with.

How does a pension figure into a net worth statement

Our next question comes from Evan. Evan says, hey, I've been addicted to your podcast for two years now and have gone back and listened to many previous to the time I started. I was super stoked to get up this morning to find a net worth worksheet in our six shot Saturday email now called The Noodle. My wife is 59 and a self employed real estate agent. I am 63 and been retired for four years. I am not collecting Social Security and do not plan on it until age 67. My question is how does a pension figure into a net worth statement? My pension is inheritable to my wife if and when she passes, assuming after me she will receive the same benefit I am currently receiving after my wife passes the pension retires. At that time. Let me know your thoughts on how I include a pension in a net worth statement. This can be a little bit of a geeky question, Evan. So the quick answer is you do not include a pension on your net worth statement. Pensions are what we call social capital in finance terms, meaning it's socialized income that you get a guaranteed payment for the rest of your life. Just like Social Security. It's not an actual financial asset that is liquid that you can move around and use in other ways. Once you receive the payment from pension and that money goes into your bank account, that becomes financial capital that would be included on your net worth statement. So a net worth statement from a financial standpoint is simply a list of all of your assets, your financial assets, usually on the left side of the ledger, your bank accounts, your checking accounts, your savings accounts, your investment accounts, your IRAs, your 401ks, your Roth IRAs, your house, your boat, any assets that you own, and then on the right side of the ledger, any liabilities, your mortgage, your car payment, etc. And then you total up all of your assets, total up all of your debt, and you subtract your debt from your assets and that's your net worth. So it's a financial asset document, Evan. It would not be included and that's the reason, because it's social capital and I think that's okay. I don't think we need to include it on there. It doesn't mean we ignore it, but it's not a financial asset. There is an alternative and Wade Pfau is a proponent of this and we have created worksheets for this one that we pulled back and that we're looking at redoing. But Wade Pfau, I believe has a calculator at retirement researcher. There's another concept which is called a household balance sheet, Evan. So now we're getting our geek hat on a little bit here where it tries to bring these non financial assets over onto a balance sheet of sorts and they call it a household balance sheet to essentially do what's called asset liability matching. So in this case, Evan, you would put your pension on that balance sheet and what you would have to do is create a net present value of, of that asset, which means we know to know how long it's going to go, you have to do a discount rate on the future payments that you're going to receive to bring it down to one value as of today, which you would put on your household balance sheet. And you would actually do the same for Social Security and for any other guaranteed payments you have. And then on the other side of the balance sheet, this household balance sheet, you would do that for your spending. So Evan, if you were to spend, you'd have to, to make it all equal out and make sense on the liability side. Let's assume you and your wife were going to spend $100,000 a year on your life and that was going to happen for the next 30 years. Well, you would want to create a present value of that spending to put on the household balance sheet as a liability. And now you can in theory better match your assets and liabilities bringing in these social capital, Social Security and pensions, et cetera. And I believe they have a calculator on their website. I like that model. I like both models of doing retirement planning. That one becomes much more difficult to manage because you have to one do net present value calculations and all these different cash flows and then you get into what net present value. I actually like both perspectives. It's an interesting exercise, but definitely not something you need to do. But that's why we I don't include it on the net worth statement.

Gene asks how should you look at total allocation of your retirement portfolio

Our next question comes from Gene related to how do you account for your allocation? When I think of 60, 40, 60% stocks, 40% bonds, et cetera, when I'm in retirement and I'm building out this income floor 5 years a la the pie cake. So the question is, if you take a five year bucket strategy, those monies are returning investments in CDs or cash or Treasuries, how should you look at the total allocation of your retirement portfolio? Gene asks if 20% of your total is in those buckets or pie cakes, I would say layers and you invested the rest of your monies that you don't need for five years out into equities. Would that be considered an 8020 portfolio? Or do I ignore those buckets and think about the allocation only on the non bucket stuff? It's a good question, Gene. I include all of the financial assets that are invested in the allocation, so the contingency fund, whatever that amount is and then the five year income floor, the second layer, let's say you're 20% in bonds. And then the third layer is what we call upside portfolio, which we have for longer term growth. Now your assumption that that upside portfolio is 100% equities, it definitely could be. It Generally is not. It will have a portion of fixed income in that portfolio as well. And that's a discussion for another day. But I go through the exercise gene by making sure I make things, the first things first, making sure your life is secure in the near midterm so you have visibility, of how you're going to get your paycheck. Visibility and understanding create confidence. Lacking that visibility and clarity, you're not going to have confidence to spend your money whether the markets are going up or down. So essentially what we're doing is we're assigning a purpose to every single dollar. But when I look at the overall allocation, I will look at it all together to see what the allocation is and then I will look at the individual pieces, meaning the floor and the upside and what those allocations are. So I sparse, I parse it out to see it as a total but also the individual pieces because the upside may not be a hundred percent equity. And I think that's a healthy way to do it. Because in retirement we need to have a purpose for every dollar because the future is now. Whereas in accumulation stage we were just saving and investing, trying to take as much risk as we can so we could let it grow. And we didn't really have a purpose other than more for later. Well, the later is here now. So it's important to have a purpose for every dollar. So it's okay, you want to look at it at all different levels. Hopefully that helps.

Eugene: Scott received feedback on Rocking Retirement in the Wild

Eugene, before we get to our into the wild scene, we have one comment I received actually via LinkedIn. I'm not on social media at all except for LinkedIn. I go there periodically. I don't know why I just. And I got a message because my team will share out our shows on LinkedIn. And I got a message from Scott. Don't know Scott. Scott said he had some feedback on the private equity show we did last week. He said the question of what am I trying to solve for? Is a good one. As all engineers and chemists know. For me and my family, excuse me. We have found that investing in a faith based private equity fund helps us achieve two important goals. Support and investing in private businesses which are doing work we believe in and want to be a part of while also hopefully providing good diversified returns to our portfolios. Roger's other point, do I need private equity? Is a good one as well. And the answer is for me, no, I don't need it, nor does anybody else really. Oxygen is a need I choose face. I can't wait to be healthy again. I choose faith based private equity for many reasons, including the two A done. Well done podcast, Scott. Well, thank you for enjoying the podcast. And I think this is a great example of he understands what he's trying to solve for and it sounds like this private equity fund is more local. I could be wrong, but he wants to support things he believes in and private equity is essentially owning and supporting companies that aren't public and those could be very small companies in your community. And it sounds like that is what he was trying to solve for, not what the financial industry is going to throw out there as all the reasons you need to have it. So Scott had clarity as to why he was doing it, so that gave him confidence in his decision. So well done, Scott. Thanks for sharing your perspective. With that said, let's go to Rocking Retirement in the Wild. All right, I was experimenting with trying to find some segue music for the rocking Retirement in the wild. I was playing around with monkey sounds and gorillas and elephants, but haven't found anything yet, so we'll update that at some point.

Scott has been helping federal employees think through their retirement plans

So I received this email a few weeks ago from Scott talking about an impact that he's been trying to have with his friends and co workers, in this case in the federal government, which you can imagine everybody there is under a lot of stress right now. So I'm just going to read his comments. He says, as a federal civil servant, I wanted to share with you my experience this week amid the turmoil that federal deferred resignation offers has created. I plan to retire this year after 35 years and have spent the last several years making a deliberate effort to optimize my retirement. This has included devouring your podcast. I have to admit, I came to it looking only for the facts and numbers. I am an engineer, after all, so I claim you tricked me into pondering the much more important, softer emotional aspects of planning a great retirement with my wife. I'm certainly no retirement planning expert, but I think that I've become an aficionado of my own retirement. Ooh, I like that. An aficionado of your own retirement. That's the one that matters, Scott. I tell you all that to tell you that I've been able to sit down with several of my co workers this past week and help them think through their deferred resignation offer. None of them wanted to see my spreadsheet with 27 interdependent sheets. I don't want to see that either, Scott. But they all appreciated that I could help them walk through a decision making process in an organized manner that let them each make a plan based on their own unique situation. Several times during those conversations I caught myself paraphrasing or outright quoting your words. Those words were a great comfort to everyone that I advised. As of this morning, it's anyone's guess what a federal resignation retirement incentive, if in any will truly look like. But I can tell you with great confidence that I and those around me are prepared with a solid decision making process. Thanks a large part to you and your team. Huzzah. And he said he didn't quote that because he would have confused them and they would have thought he was in a bad mental state. Very respectfully, Scott. Wow, Scott, that is the power of all of us working and noodling on this stuff together. And I have learned so much and improved my skills through our conversations and your feedback that has had. I want to know, I want you to let you know your feedback. All the emails good and constructive and everything else has had an impact on me which has had direct impact on individuals during a moment when they were making decisions. I'm honored to be part of that with you, Scott. What a blessing for you to be able to help the people in your world find agency in a very scary world, right or wrong on everything going on with the federal government now. And this right sizing or whatever you want to call it is the human aspects getting lost a lot and you are able to be there, help people find agency and think of a pathway to get to an organized decision. Doesn't mean that it's the best decision or it's the right decision or that it's not a difficult decision. But it definitely brings more clarity and confidence and peace and not feeling like we're just drowning. So what a blessing for you to be able to do that with everyone and I'm honored to be a part of that journey with you. On your marks, get set. And we're off to set a little baby step we can take in the next seven days to not just rock retirement, but rock life. All right, in the next seven days, revisit the age you're going to use in your retirement plan. If you're a female, assume 94 as a default. If you're a male, assume 92 if you want to use one of the calculators. But remember, don't get too cute on it, but just know that you've thought through it in an organized way so you can move on to other decisions.

Zigmund logs mission 28, August 15, 1944 over Europe

All right, now we're off to log another mission with Zigmund. Can I believe he was a Gunnery Sergeant Zigman canceler in World War II, flying in B17s over Europe. Let me see, what mission are we on here today? We got a big one. Mission 28, August 15, 1944. Ship number 339 sortie 19th left for Corsica yesterday and stayed over there to take part in the invasion of southern France on the 15th. Got up at 3am the group was in the air by 6:20am had to bomb, gun positions to help landing troops. Went over the target twice but due to solid overcast, could not drop bombs. Didn't dare drop them after 7:30. Afraid to hit our own troops. No flak or enemy fighters encountered. Carried 61000 pound bombs. Mission 5 hours 30 minutes. Altitude 18,000ft. Never saw so many planes in the sky at one time as today.

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