Life Expectancy and Investing

Life expectancy is an important part of both financial planning and money management.  Life expectancy is the average, at any given age, an individual is expected to live.  Of all individuals at that specific age, some do not reach life expectancy while others exceed it. 

Each year, each of us gets older, which is a good thing, life expectancy decreases.   For example, according to the Social Security website, the life expectancy of a male who is 65 is about 19 years.  A female, age 65 would longer, about 22 years.  As would be expected, the joint life expectancy couple, both 65, would be significantly longer.  Again, according to the Social Security website, life expectancy for a male age 80 is about 9 years and a female is about 10 years.  A couple, both age 80, again as expected, life expectancy would be longer.

It is also not uncommon for an individual or couple close to or after retirement to believe they should be more conservative in investment strategy during retirement. It is certainly the individual or couple’s decision to do so, but this has never made sense to me.   For example, if an individual who is 80 decides to invest in a specific equity with a time horizon of five years, the individual’s life expectancy is almost twice as long as the investment time horizon. 

Why would an individual at age 80 invest make an equity investment?  For the same reason’s any other individual makes an equity investment.

  • To have the potential to earn a higher return then a minimal or low risk investment. 

  • The individual is in good health and hopes to live to life expectancy or longer and wishes to not only maintain the buying power of the portfolio over time, but hopefully increase it. 

    • Even though we are currently low inflation period, there is no guarantee that will continue.  Some expenses during retirement, health care for example, may increase even faster than the average annual inflation rate.

    • Assuming a 3% inflation rate, it will take $1,159 at the end of a five-year period, to buy what would have cost $1,000 at the beginning of the five-year period.  Given current interest rates, a minimal risk investor may have the same amount of money at the end of five years, however, in terms of what the investor can buy, the investor has actually lost money.

  • A retiree wishes his or her estate to continue to grow to benefit heirs, designated charities, or a combination of both. 

I would suggest before making any equity investment, a retiree of any age should do the following:

  • Have at least 3-5 years of income plus any expected lump sum expenses within the following three years in a minimal or low risk investment account.   For example, in a $100,000 portfolio with an annual withdrawal of $5,000, this would mean at least $15,000 to $25,000 in minimal or low risk accounts.

  • Accept the volatility that goes with an equity investment and a five-year time horizon.  This is not an age question, but an understanding and acceptance of volatility question.  As is discussed in my article “Are you an Average Investor”, many investors look at a performance report, see a market decline and turn an unrealized decline in a realized loss.  This is not an age concern, but an understanding of return concern.  

There are a number of factors taken into consideration when building a Portfolio and an understanding of life expectancy is one of them. 

*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.