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Longevity complicates retirement

Jeffrey Apps and Tracy Tutag

Americans are living longer. Life expectancy for Baby Boomers (born between 1946 and 1965) is greater than for any previous generation. National Center for Health Statistics tables show that life expectancy increased by 30 years during the 20th century – from 47 in 1900 to 77 at the millennium. In addition, figures compiled in the Society of Actuaries’ 2000 Annuity Table estimate the life expectancy of men 65 years old to be another 15.9 years. At the same age, women can expect to live an additional 19.2 years. What do these numbers mean to you? The good news is that your retirement may be years longer than you thought it would be. That could also be the bad news. It all depends on how well you have planned and saved for your retirement. Longevity is, increasingly, becoming a major factor in retirement planning.Recent surveys have sought to determine whether Americans are aware of the implications of longer lives in relations to future resources of income. Questions concerning Social Security, pensions and individual savings – referred to as a “three-legged stool” in the traditional paradigm of retirement income – were included in the surveys.These surveys have found major misconceptions regarding these three important retirement issues. Let’s look at a few of these misperceptions and their potential impact over longer life spans.Social SecurityThe Employment Benefit Research Institute (EBRI) 2003 Retirement Confidence Survey found that the average retirement age is 62. When EBRI asked respondents when they thought they could receive full Social Security benefits, 51 percent believed that they could claim full benefits at a younger age than is actually the case. Most people working today won’t be eligible for full benefits until age 67. Since Social Security accounts for clost to 40 percent of the average retiree’s income, this lack of awareness can adversely impact plans about when to retire, how much Social Security income to expect and how much more money will be needed in retirement.PensionsPensions, or Defined Benefit plans, are traditional employer-funded retirement plans that provide income for life. These plans are guaranteed (up to a certain limit) by a federal agency. According to the Department of Labor, the number of these plans has dropped from 139,000 in 1979 to 56,000 in 1998. The number of these plans and workers covered by them continues to decline.Defined Contribution plans, such as 401k plans, are primarily employee-funded. Between 1979 and 1998, the number of these plans increased from 331,000 to 674,000, according to the Department of Labor. In these plans the individual employees are totally responsible for deciding how much to contribute, where to invest and how the money will be distributed at and through retirement. The employee assumes all the risks.According to Merrill Lynch’s 2003 Retirement Survey, 50 percent of all Americans believe that their 401k or Defined Contribution plan is guaranteed by law up to certain limits. They are not. Losses sustained in the account when the employee is at, or close to, retirement can prove devastating.SavingsIn the National Retirement Planning Coalition’s (NPRC) 2002 Survey of Prospective Retirees, 31 percent of the respondents reported less than $50,000 saved in Defined Contribution plans, with another 40 percent having between $50,000 and $199,000 in such plans. Personal savings excluding retirement funds and home equity is also modest, with 38 percent of participants reporting having saved less than $50,000. How long would these nest eggs last? People often use 85 as an assumed life expectancy when calculating retirement needs. The life spans reported earlier are averages, so half of those 65 year-old males will live past 80 and half of the 65-year-old females will live past 85. What does all of this information mean? Many people are concerned about this longevity risk and are making plans to help them achieve a happy, healthy, lengthy retirement. Jeffrey Apps and Tracy Tutag offer securities and investment advisory services through AXA Advisors LLC. Vail, Colorado


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