Fall 2008

Great Expectations
By Neal E. Cutler, PhD
Aging Well
Vol. 1 No. 4

For as long as most of us can remember, the key financial challenge in aging well has been successful retirement planning. However, for two sets of variables, the more appropriate 21st century response to this challenge is longevity planning. The first variable focuses on trends in work and retirement. The current reality is that boomers are not retiring in the way their parents did. The second variable concerns increasing longevity. It is not just life expectancy at birth that has improved but also life expectancy in older age. The result of these changes is that consumers and savers, employees and employers, clients and advisors should plan for longevity and not simply look at the relatively brief act of retirement.

As a preface to these critical decisions, however, consider a fundamental connection between longevity and finance identified in a new book on financial planning, How Not to Go Broke at 102: Achieving Everlasting Wealth by Adriane C. Berg. An attorney and one of the founders of the National Academy of Elder Law Attorneys, Berg is a financial planner and marketing advisor to businesses that work with boomers. From her various perspectives, Berg argues that whatever other considerations may be involved—biological, statistical, financial, or demographic—from the vantage point of planning, longevity is psychological. It is a personal expectation of how long we will live.

A 25 year old who doesn’t expect to live past the age of 67 will plan differently from the one who expects to live to the age of 100. These expectations are influenced by personal factors, such as health, parental health, and mortality, and societal factors, such as the state of the economy, pension, and social policies. And since longevity trends have been amply publicized and emphasized for many years, today’s middle-aged boomers are more than likely to have personal expectations of substantial longevity. At the same time, trend data over the past decade also reveal that the facts, the timing, and the financial culture of retirement have become much less clear.

Good-Bye Retirement Planning

Although 65 will likely remain our culturally perceived definition of retirement age, for decades, American workers have exited the labor force substantially earlier. The causes for early retirement may be assessed and debated for years, but the evidence is rather clear. Analyses presented in 2007 by the Employee Benefit Research Institute, for example, documented that by 1975, the early retirement trend was substantial—only 35% of American workers aged 55 and older (49% of men and 23% of women) were still in the labor force. In 2006, despite the financial dislocations of a declining stock market and a shaky economy, the pattern of early retirement did not significantly abate—only 38% of workers aged 55 and older were still in the labor force (45% of men and 32% of women).

Major national opinion surveys by AARP, the National Council on Aging, and others reveal that boomers are changing their views and personal predictions of retirement. As a generational cohort, boomers are retiring early, retiring later, retiring partially, and not retiring at all. And when we consider improvements in longevity, even retiring on time, at or around the age of 65, means that men and women have another quarter century to finance. Therefore, from a financial perspective, the appropriate conclusion is that retirement planning is no longer the best way to plan for the future.

Hello Longevity Planning

In most public discussions of increasing longevity, the focus is on the dramatic changes that have taken place in life expectancy at birth. A baby born in the United States in 2005 can expect to live, on average, to age 78—a 29-year increase compared with the age of 49, the life expectancy for a baby born in 1900. In other words, aside from questions of an ultimate biological limit to the human life span, the actual number of years that we live is increasing.

Additionally, life expectancy at older ages is also improving. The raw numbers may not look as dramatic as the increased life expectancy for babies, but the impact is substantial, and the relevance to financial planning for later life is clear. From 1900 to 2005, the increase in life expectancy at the age of 65 was substantial. If a financial advisor in 1900 had been asked about the average longevity of a 65-year-old client, the mostly accurate response would have been another 12 years, until about the age of 77. In 2005, however, the response would have been an additional 19 years, or until about the age of 84, an increase in older age longevity of 58%.

Furthermore, in 2005, a 75 year old could expect to live to the age of 87. These numbers illustrate the social psychology of expectations previously mentioned. It’s likely that a 65 year old who expects to live to age 84 will save, invest, spend, and plan differently from one who expects to live only to 77.

These trends should not be surprising. The underlying variable is related to improvements in both personal and public health practices. We’re not only adding years to life but also adding life to years, as the saying goes. At the Andrus Gerontology Center of the University of Southern California, associate dean and demographer Eileen Crimmins, PhD, and her colleagues are researching the HALE concept, or health-adjusted life expectancy. Data indicate that from 1970 to 1990, almost all the years of increased longevity (the age of 65 and older) are years of good health and little disability.

Improved diet and exercise information, attitudes, and behaviors, a range of medical breakthroughs, reductions in the mortality impacts of diseases of old age, and substantially increased access to healthcare for older adults in the form of Medicare all contribute to significant improvements in older age longevity. Since these data aren’t secret, media discussions of increasing longevity serve to expand and shape individual expectations, as well as hopes and worries, about individual longevity.

Longevity Meter

Consider the public’s view of longevity and associated financial concerns. In the American Perceptions of Aging in the 21st Century survey conducted in 2000 for the National Council on Aging, a national sample of respondents of all ages was asked, “Would you be happy or unhappy to know that you would live to be age 75 or older?” Among those surveyed, 93% said happy with virtually no difference across age groups. Eighty-nine percent of respondents, again with little difference by age, said they would be happy to live to age 90. This endorsement of longevity is mirrored by optimism concerning health and science. Eighty-five percent of respondents of all ages were optimistic that science would invent cures and treatments for most health problems associated with older age.

At that point, however, the positive responses came to an end. In a follow-up question, only one half of the otherwise optimistic respondents estimated that they would be able to afford those new cures and treatments. And while some respondents felt that they may outlive their retirement income, a larger percentage of men and women in all age groups worried that they would have to spend most of their retirement income on long-term healthcare.

Whether we retire early, late, or on time, the key challenges currently come from the increasing number of years we are likely to live in older age. Compared with previous decades, in the 21st century wealth span, we have fewer years to accumulate financial resources, and that which we accumulate has to last for a greater number of years. Overall, when we consider financial resources for our older years, the focus must be on longevity planning.

— Neal E. Cutler, PhD, is executive director of the Center on Aging of the Motion Picture & Television Fund in Woodland Hills, CA.