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Retirement Planning -- What Does Dying Have To Do With It?

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Before taking the leap into retirement, we need to give a lot of thought to how prepared we are for 20 or more years without a paycheck. The most important question, of course, involves income and expenditures, those we can anticipate and those that are harder to predict, such as long-term care. And will there be enough left over to pay for some of the fun things we have been looking forward to? Fortunately, numerous websites, publications, and retirement calculators are available to help us with these questions.

Although some people really do not want to retire and others say they cannot afford to, most of us look forward to some years of leisure after decades at work. In the end, most of us will retire, even though that might occur at a later age than it did for our parents. Recent statistics from the Bureau of Labor Statistics show that in 2013, one in three Americans aged 65 to 69 were working or looking for work, up from one in five in 1990. By age 75, however, only about 13 percent of older Americans remain in the workforce.

The longer people work, the more time they have to save for retirement and the less they need to put aside, since each additional year on the job is one less year of retirement to fund. Still, we should have some idea of how many years in retirement we need to finance. This critical question is one of the hardest to answer. Life expectancy at 65 is about 19 years. But that is an average, and we aren't all averages. Some of us will live fewer and some many more than 19 years. Women typically live longer than men and whites longer than African Americans, although there are many exceptions. Centenarians are still few and far between, but their numbers are increasing. Will you live until you are 100? Can you afford to? How about to your late 80s or early 90s, which more of us are likely to reach? If married, how long might your spouse survive you?

We don't know all that much about the actual decision-making process that workers go through as they ponder the pros and cons of retiring. The Society of Actuaries Post-Retirement Needs and Risks Committee recently gained insights into retirement decision-making from eight focus group discussions with people who had retired within the past several years.

These retirees had given some thought to how long they might live when considering whether to apply for Social Security earlier or later. Often they conducted what is known as a "break-even" analysis of how long it would take if they delayed applying for Social Security to collect what they would have gotten had they signed up earlier. Yet even when they thought they would live beyond the break-even point, they tended to go for earlier benefits, so it is not clear just what impact their life expectancy had on their decision-making.

The focus group retirees were asked specifically how long they expected to live. Although they often looked at family history, a good but not perfect indicator, they still viewed the answer as unpredictable -- a toss of the dice. Yes, genes are important, but these retirees saw themselves as different from people in their parents' or grandparents' generation when it came to health and lifestyles, so parents' longevity might not be what counts. Moreover, even if a parent's longevity is likely to be a good predictor of one's own, you have people like the retiree whose father died at 76 and whose mother was still alive at 91. Where did that leave her?

People usually aren't eager to talk about when they think they will die, which may be one reason that we don't generally see a question about expected age of death in retirement surveys. When it is, "don't know" is a common reply.

The ongoing Health and Retirement Study (HRS), launched in 1992, has asked about the probability of living to certain ages, and recent research published by the Center for Retirement Research (CRR) at Boston College finds a link between people's expectations of living to those ages and their expected retirement age.

The CRR report by Mashfiqur Khan, Matthew Rutledge, and April Yanuan Wu shows that people who are more optimistic about living longer expect to work longer. They are also more likely to end up actually working longer, although the relationship between actual retirement age and what the researchers refer to as "subjective life expectancy" is not as strong, undoubtedly because the best laid plans or expectations are often derailed by poor health, job loss, or caregiving responsibilities.

Will more people be working longer as they live longer? The CRR report concludes that along with increases in actual life expectancy, "subjective life expectancy needs to increase as well" if we aim to extend working life, which would enhance ultimate retirement income security. Annuities like Social Security can help ensure that we won't end up with no income no matter how long we live, but we can outlive savings and lump-sum pension and 401(k) distributions. For those of us who do look forward to retirement, figuring the best balance between continued employment and years out of the labor force is a challenge. Age of death may be uncertain, but for most of us, it is probably wiser to think later rather than sooner.

Employment Update: The year did not end on a particularly high note for older workers. The unemployment rate, which had fallen sharply in November, rose somewhat in December for the aged 55-plus workforce. Still, at 5.1 percent, the rate was well below the 5.9 percent it was a year earlier.

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