How to calculate your life expectancy and make a plan to not run out of money

What are the odds that one of them will outlive their 25 years of savings? More than 60%, according to this calculator from the American Academy of Actuaries and the Society of Actuaries. The calculator uses the same Social Security data with a few basic health questions mixed in.

Looking at averages is not a foolproof way to determine how long you can expect to live. People die at different ages over a period of decades. According to the actuaries’ calculators, a 65-year-old man in excellent health who does not smoke has a 95% chance of living to 70, a 79% chance of living to 80, a 43% chance of 90 and an 8% chance of 100.

“It’s a challenge,” says Richard Faw, a Philadelphia-based financial adviser and actuary. “We have never set up a financial plan based on life expectancy.”

For married couples, the math gets even scarier. If the 65-year-old man is married to a 65-year-old non-smoking woman with the same health, there is a 10% chance that one of them will be alive at age 103.

“These retirement periods are much longer than people plan,” says Linda K. Stone, senior retirement fellow at the American Academy of Actuaries. Further complicating matters, it is common for a spouse to live another 10 or 15 years after the first spouse has died, she notes.

The variation in life expectancy represents a major financial planning challenge. Spend too much and you’ll run out of money long before you die. Use too little and you will unnecessarily shrink your golden years.

But there are steps you can take to make sure you have enough money no matter how long you live. They include using an actuarial calculator to obtain a more realistic estimate of your likely life expectancy and then creating a base of regular income from Social Security, pensions, annuities and other secure sources to cover essential expenses. If you’ve taken these two important steps, you’ll have a lot more flexibility in what you do with the rest of your money.

Here’s a guide on how to properly plan for longevity.

Take your calculations one step further

Start with this life expectancy calculator from the actuaries. It requires five pieces of information: date of birth; sex; retirement age; whether you smoke; and whether you rate your general health as poor, average or excellent. “We tried to keep this simple with the factors that make the biggest difference,” says Stone of the Academy of Actuaries.

Of course, smoking has a big effect on your lifespan. A 70-year-old woman who smokes in average health has a 50% chance of living 12 more years. If she does not smoke, her life expectancy increases to 18 years.

General health is another key. Consider the 70-year-old female non-smoker. If she rates her health as poor, she has a 50% chance of living 16 more years; if she rates it as excellent, it increases to 20 years.

How well do we know our own health? “People have a better sense of their health than their longevity,” says David Blanchett, head of retirement research for the PGIM unit of Prudential Financial.

Instead of a single number for life expectancy, the calculator gives you probabilities for different ages. If you’re not too worried about outliving your money, use the age where the calculator says you have a 25% chance of being alive, says financial writer Wade Pfau, who wrote Guidance on pension planning. To be even more cautious, choose the age where you have a 10% chance of being alive, adds Pfau.

Create a plan to cover essential expenses

The first step is to wait as long as possible to claim Social Security, the only current major annuity that is adjusted for inflation. Your monthly benefit will increase by at least 76% if you claim 70 instead of 62.

If Social Security and other pensions you receive are enough to cover essential expenses like housing, food, and health care — tips on how to do it here — then you’re good to go. If not, there are other steps you can take to increase your secure income.

One option is to buy an annuity. Currently, annuities for a 70-year-old man have annual payouts of up to 8.42% from a top-rated insurance company, according to Annuities.com, a website that sells annuities from various insurance companies. Fees are fairly minimal on these basic annuities, although commissions and surrender charges can be significant on other more complex annuities, so be careful to understand what you’re buying.

Another option is to set up a ladder of Treasury Inflation-Protected Securities, or TIPS, to cover your retirement. Rising real interest rates have made TIPS more attractive. If you put $1 million into a series of TIPS maturing over the next 30 years, you could get about $41,600, adjusted annually for inflation, Pfau calculates.

The advantage of a ladder is that you retain control over your money. If in two years you decide to give your money to charity and join a monastery, you can do it with a bond ladder. You can’t do that with an income rate. On the other hand, the annuity will continue to pay even if your pension lasts more than 30 years.

Be flexible with your spending

The 4% rule, devised by adviser William Bengen in the 1990s, says a retiree can safely withdraw that percentage each year, adjusted annually for inflation, from a portfolio of stocks and bonds for 30 years. It remains a practical rule of thumb for evaluating the viability of your extraction strategy.

But if you’re willing to be more flexible, you can withdraw more money than 4% during periods of good returns from a portfolio of stocks and bonds, and you’ll never run out of money, even if your retirement lasts longer than 30 years.

The simplest approach is to use the table provided by the government for required minimum distributions from tax-deferred accounts. For a 73-year-old, the RMD is 3.77% of assets. Each year, the required percentage increases as your life expectancy decreases. At age 90, your RMD will be 8.2%

The RMD approach automatically adjusts for bear markets. If your portfolio fell 15% last year, your RMD will fall almost 15%.

This means that your discretionary spending will decrease during bear markets, and you need to be ready for it. That vacation to Naples, Italy may turn into a vacation to Naples, Fla., but you’ll also find some great restaurants in Florida.

Many financial experts see the RMD percentages as overly conservative. Pfau recommends multiplying all percentages by about 1.5. This has the effect of allowing more consumption early in retirement and less late in retirement, when consumption tends to decline anyway. Even with this adjustment, you won’t run out of money.

Make adjustments along the way

You might think your chances of reaching 95 are slim, but if you live to 90, they’re actually good.

If you end up living longer than you planned, you may decide to cut back on your discretionary spending. Another option is to buy an annuity to avoid running out of money. Because of your age, you will get a fantastic payout.

A 90-year-old plunking down $100,000 for an annuity can currently get a payout of 21.46% from an insurer with a top credit rating. The insurance company will come out if the pensioner dies within the next two or three years. But suppose the retiree lives on for another decade. He would get $21,460 a year from the annuity and not have to worry about running out of money.

Another approach is to keep an emergency fund that you tap into only after you’ve spent all your money. Susan Elser, a financial advisor in Indianapolis, says many of her clients have tax-free Roth IRAs. Because this is the most tax efficient vehicle, they are typically the best way to leave wealth to children. But if her clients run out of money for retirement, they can open the Roth IRAs.

“The longer you live, the better your Roth IRA looks,” she says.

Write to Neal Templin at neal.templin@barrons.com