Planning for the Long, Long Term

Most people looking to implement a financial plan are making decisions with the long term in mind. While what long term means tends to vary depending on factors like age, individual and family goals it’s safe to say most planners and their clients would agree that long term is usually measured in years, not months. Whether it’s the young professional first considering a still-distant retirement age or a retiree trying to leave a financial legacy, the idea is the same: plan today for an uncertain future.

What often gets lost in this perspective is just how long the long term can be.

Life Expectancy in the 21st Century

It’s probably a reasonable claim that in recent decades each generation in the US was able to live longer than the preceding one.

What’s both amazing and challenging at the same time, at least from a financial planning perspective, is that over half of Americans tend to underrate their own life expectancy.1 This coincides with the fact that life expectancies are rising at a remarkable rate.

Recent research forecasts that an average male of age 65 in the US has a 40% chance of living to age 85. For the average female at age 65 the chance of living to age 85 is a remarkable 53%. Still more astonishing is the fact that a married couple of age 65 has a 72% chance that at least one of them will live to be 85. 1

How Does This Longevity Information Impact Financial Planning?

Put simply, this means that a couple in their 40’s or early 50’s who are making a financial plan need to define their long term as being at least 40 years. If this same couple also wants to leave an estate for their children and current or future grandchildren this means the financial plan may need to take into account a time horizon of 50 years or more!

Thankfully making specific predictions about what the future will look like in 40+ years is not the purpose of a financial plan.

For most of us the real question a financial plan tries to answer is “based on the financial decisions we make today is it reasonable to expect we will meet our goals for the future?”

What Steps Can I Take Today?

Depending on your individual circumstances and goals it may make sense to treat the possibility of living to an age beyond what you had planned for as a risk that needs to be insured against. This “longevity risk” can be managed with a variety of strategies. Selecting the right age to start taking Social Security, taking advantage of insurance and annuity products, and carefully managing debt are all legitimate ways to approach the risk of longevity.

But what about specifics, like exactly how much longevity insurance is needed? What is the right age to tap Social Security?

A good planner can help answer these and other long term related questions, as there’s no one size fits all answer. This is all the more true when planning for decades, when a lot can happen between the day you first make a plan and all the life events (planned and unplanned) that take place each day after. For this reason it makes sense to work with a professional who can help you take the right steps toward your long, long term goals.

^{1http://www.forbes.com/sites/ashleaebeling/2012/08/10/americans-clueless-about-life-expectancy-bungling-retirement-planning/}