5 Planning Decisions Affected By Life Expectancy
Make better decisions by doing research on your own life expectancy
An insurance company does underwriting before issuing products affected by life expectancy. It may make sense for you to do some of your own underwriting or analysis on your own life expectancy too. You can use your estimated life expectancy to make better decisions in the following five areas.
1. When to Take Social Security
Social Security doesn’t know your health history. If you live to your life expectancy based on standard tables, whether you take Social Security early or late, you’ll get the same amount.
Knowing your personal life expectancy can help you work the system and make the best choice considering your individual circumstances.
If you are single and think you are likely to live shorter than average, taking Social Security at 62 probably makes sense for you. If you're married, think you or your spouse might live longer than average, or you are single and super healthy, you'll want to consider the impact of delayed retirement credits, which boost your benefits up quite a bit if you wait until age 70 to file.
2. What Pension Option to Take
Many pension plans offer either a lump sum or annuity payout option.With the annuity option, you usually choose the term of the payout; such as life-only, joint-life, or term-certain. If you expect to live longer than average, with most plans you'll be best off taking the annuity payout instead of the lump sum and choosing a term option that pays out for as long as you (or you and a spouse if married) should live.
If you think your life expectancy is shorter than average, a lump sum or term certain option may make more sense. If married be sure to consider the life expectancy of a spouse, and make sure you choose the term most likely to maximize your joint lifetime family income. This could be an option that pays 100% of the benefit to a surviving spouse, 75% or 50%.
Your choice may have a big impact on your spouse should they become a widow or widower.
3. Whether to Buy an Immediate Annuity
When you buy an immediate annuity, the payout is based on average life expectancy, not your personal health history. If you lead a healthy lifestyle and come from a long-lived family, insurance products like immediate annuities or longevity insurance may make a lot of sense for you.
If you are near retirement, and you don't have sources of guaranteed income other than Social Security, look into putting some funds into an immediate annuity. If you are ten to fifteen years away from retirement, you can look into a deferred annuity which will guarantee you an income at retirement age. If you're more concerned about your later years, parking some money in longevity insurance can ensure that the 80 or 85-year-old you will have enough.
4. How Much Inflation Protection You May Need
The longer you live, the more you’ll feel the effects of inflation in retirement at the gas station, grocery store and at the doctor’s office. If you expect to spend thirty of forty years in retirement, building a retirement income plan that accounts for inflation will be more important for you than for someone who estimates only fifteen or twenty years in retirement.
You should also look into long-term care insurance. A long life is great; it also means more years where you may need assistance around the house, or have medical care needs. Long-term care insurance can help pay for these costs at that time.
5. Whether to Keep Your Life Insurance
If you’re making a decision with big consequences, such as whether to cancel a life insurance policy, you may want to consider running a customized life expectancy report first. A lot of dollars are at stake, so just as an insurance company would do underwriting before insuring you, you should consider doing underwriting on yourself before making these types of decisions.
For couples, if you’re both age 55 today, statistics say there is a 65% chance one of you will make it to age 85 and a 15% chance that one of you will celebrate your 95th birthday.
For white collar workers, the odds are even higher that you'll live longer.
After you each develop your personal life expectancy profile, compare notes. If the odds say one of you is likely to go much sooner than the other, plan accordingly by using the following guidelines:
- Make sure you have adequate life insurance.
- Choose pension benefits or annuity benefits that will provide sufficient income for the spouse with the longer life expectancy.
- Buy long-term care coverage that provides benefits that can be shared between the two of you. This will be less expensive than a separate policy for each of you.
- Make sure accounts are titled appropriately, and beneficiaries are properly named so a surviving spouse can easily take over management of financial items.
- If you are the spouse with the shorter life expectancy, and the one who handles finances, start sharing responsibilities now or make sure your spouse has a good relationship with a qualified financial advisor.