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Live Better By Planning to Die

Death and Taxes, two unpleasant things we can’t avoid but need to think about.  Most of us think about taxes when we need to, the IRS makes sure we remember and most Personal Financial Planning Software helps you account for money that goes to taxes in your forecasts in a number of ways.  The real good news I think though, is that thinking about death rationally can help us to live richer lives.

A retirement plan should factor life expectancy.
Don't fear the reaper.

Mathematically speaking, the reason is simple.  If you act like you’re never going to die, you’ll be budgeting to live off of only the returns on your investments and whatever income you can generate from work, annuities or pensions during retirement…after inflation of course.  For some that may be fine, but for the vast majority of us, that can lead to a much more miserly existence than circumstances dictate.  This means most of us need to plan on a Life Expectancy.

Once you set a stake in the ground that you are comfortable with…are able to build your plans around the expectation that you will live to be a certain age, you then have a basis for a retirement plan that includes drawing down your principle.  Given a target year, the amount you draw down can be calculated to reduce your investments, after returns, at such a pace that you don’t run out of money in your lifetime.

This will give you a lot more to spend in most cases.  This is almost always  a much more sensible goal than leaving a large amount of money in the bank after we are gone.  If leaving an inheritance is an important goal to you, having a life expectancy and target amount to leave in mind can be incorporated into such a financial plan.

So while thinking about your own (and your spouses if applicable) likely life expectancy can be unpleasant, the rewards are compelling.  That begs the next question…what is a good age to use?  The answer to this is very similar to the answer to the question “how should I invest?” in that the question that decides the answer is “What’s your risk tolerance?”.  Detailed actuarial data exists to allow you to calculate the probability of living to a certain age given your birth date and gender.  This data is publicly accessible from the US Social Security Administration and we even use this data in FinanSavvy.com to calculate the answer for you.

To get an answer, you need to decide the odds of survival you are willing to accept.  Do you use a date based on an average lifespan?  Do you want to know the age you only have a 20% chance of living to (we recommend that) or would you prefer to target a date that you only have a 5% chance of living to see so you know you have a 95% chance of not out-living your savings?  Only you can answer that question.

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