Investors Should Add 5-8 Year ‘Cushion’ to Retirement Plan: Morningstar

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While people who have planned for retirement may think they’ve got their futures pretty well taken care of, a new study by Morningstar Investment Management finds that investors frequently underestimate the number of years they likely have left and may fail to plan accordingly.

While a number of variables such as gender, income, household health and smoking status factor into how long someone is likely to live, the detailed study “Estimating ‘The End’ of Retirement” finds that even those who feel they’ll be around for 20 or 30 years after retirement may be underestimating their own longevity — and thus not funding their golden years appropriately.       

The study finds that individuals would benefit by adding an extra five years to their expected lifespan, while couples — who must take into account that one partner may well survive the other — should plan for an extra eight years. 

The report also noted that financial planners, who are likely to counsel more affluent (and longer-lived) individuals, are themselves disposed to use varying means to estimate how long their clients will live and their consequent income needs.

“There is no consensus approach to estimating the length of retirement among financial planners, even if the decision is based on the same underlying mortality rates (or life tables),” the report said. “Some planners are going to use more conservative assumptions than others, for a variety of reasons.”

It noted that individuals who estimated that they had no chance of living to 75 actually had about a 50% chance of reaching that age; on the other hand, respondents who said their odds of reaching 75 were 100% actually only had about an 80% chance. 

The report also said standard retirement plans routinely estimate end of life ages at 90 — as do about 70% — or 95, as reflected in 20% of such plans.

“In theory, retirement periods should be personalized for each client in a financial plan, based on that client’s facts and circumstances, considering various attributes such as years until retirement, income, health status, smoker status, and so on,” wrote the report’s author, David Blanchett, the head of retirement research for Morningstar’s Investment Management group.

“Through simulations it is determined that adding five years to the life expectancy estimate for a single household, and eight years to the longest life expectancy of either member of a joint household (or to each member if separate end ages are used for spouses), at the assumed retirement age, is a reasonable approach to approximating the retirement period,” wrote Blanchett. 

“While more complex approaches that consider the distribution of mortality would be more robust, such as modeling survival stochastically, these techniques are uncommon in planning tools today,” the report said. “These models suggest a retirement period last lasting to age 95 (that is, 30 years) would be appropriate for the average 65-year-old male/female couple retiring today.”