Thursday, August 25, 2005

How long a retirement should we plan for?

Half of today's college students will live to be 100 years old, according Nobel Prize winning economist Robert Fogel, as reported by Robert Samuelson. That's well above the prediction of today's actuarial tables, which Fogel believes are too conservative. He says that in the late 1920s, life insurers "put a cap of 65 on life expectancy." We all know how wrong that is.

One who enters the workforce at age 25, retires at 65 and lives to 100 will spend nearly one half of his or her adult life in retirement, not working. Is that economically tenable? Samuelson advocates the politically unpopular solution of raising the retirement age to 70 over time. I think he's on the right track.

Do today's trust prospects have a good understanding of their likely longevity?

1 comment:

JLM said...

Yes, I think trust prospects are are old enough to realize they may live a long time. For one thing, they're learning from their parents. Here on Ragged Neck, New England's least significant shoreline promontory, Joy, a young grandmother, had to come help out her 80-something father during his bypass surgery recently. A few steps down the road, Dave and his wife, Linda, had to tackle the difficult task of easing his 80-something mother into assisted living.

Slightly younger wealth-management prospects would, I suppose, be less likely to have a clue.

The admirable Retire Early web site has done interesting studies of safe withdrawal rates for retirees. If somebody who retires at, say, 60, is realistic enough to allow for the possibility of living until 90, he or she doesn't have to sacrifice much in order to stretch retirement capital to age 100. Actually the calculations suggest that a withdrawal rate of around 4.5% could be used over either 30 or 40 years with only a 10% chance of running out of money too soon.