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What age should retirement be planned to?


Standard deviation curve

One of the big discussions in the profession is choosing the age retirement should be planned to. Should it be age 95? Age 100? Some other age?

Here’s a good brief discussion on the implications of choosing an age: “How Life Expectancy Affects Retirement Planning” by Mark Miller at Morningstar.

Assuming you’re younger than in your 60’s, if you choose an older age to plan to, say age 95 or 100, then you constrain spending today to have more money then. If you choose an age younger that 95, then you can spend more today. The reason is simple – you choose to spend money over shorter, or longer periods, results in how much money you can spend each year over your chosen time period. Shorter periods (to a younger end age) allow you to spend more each year. Longer periods (to an older end age) allow you to spend less each year between now and that end age.

Sounds logical. But … here’s the issue with this oversimplification …

This static view of trying to resolve a question today distorts the income you may be able to spend today, as I briefly explained above between length of period choice. Additionally, we really don’t know to what age to plan for. However, statistics helps frame the answer methodologically. And … by recognizing that as we age, we NEVER reach our present age’s expected longevity age (and by purposeful design – never reach a strategically selected rolling longevity percentile WHILE we continue to age as well).

In other words, combining both a rolling end age and a slowly increasing longevity percentile (moving towards the right tail of older ages) continues to address the “to what age” issue while you age. There’s no need to rush to an answer because you can continue to move the goal posts as you age (not that your demise is a goal; but it is a reality that needs consideration and planning).

Research in this paper discusses how to use Longevity Percentiles from longevity tables to determine what are the statistical odds of outliving any given age. You should expect to get older as you get older! This correlates to the prior bold point of strategic selection of rolling ages as we age. This concept is what Cotton is referring to, as dynamic, in the Morningstar article above.

This article illustrates, graphically, what aging and continuing to select rolling end ages as one ages, looks like. Essentially, it shows that the ending age continually shifts older and older. It also shows that uncertainty (difference between sooner, or later demise widens relative to how much time remains: “Coefficient of Variation” by Mitchell referenced in research paper).

Moral of the story:

Rather than try to resolve the question of what age to plan to early on, simply use statistics and their characteristics (i.e., longevity percentiles), to SLOWLY advance the age you’re more and more unlikely to outlive as you age. Why? Because, by picking an age you’re unlikely to outlive early on in retirement, you restrict spending precisely during the years you’re more likely to be around to spend your money!

PS. A bit more important than picking the end age for planning purposes, is getting an idea of how retirement looks for you in the first place!

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