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Get your arms around retirement planning.
TIME MARCHES ON

We are way too optimistic about how long we’ll live

By John Detrixhe

How long do you think you’ll live? The question might be macabre for some, but it’s a vital part of planning for the future. Underestimating your lifespan means you could run out of retirement savings in old age, giving the “golden years” less of a glow. Overestimating it may lead to excessive thrift while you’re alive.

When it comes to these existential matters, it turns out that Germans are the most optimistic, with three-quarters of wealthy investors surveyed by UBS saying they expect to live to 100. Only a third of Americans, meanwhile, feel the same.

All are far too hopeful about living to 100, according to Michael Crook, a managing director for UBS Wealth Management. The odds of living that long are closer to 10%.

If most people overestimate how long they’ll live, they have a funny way of showing it when saving for retirement. Collectively, the world will face a $400 trillion shortfall in retirement savings by 2050, according to the World Economic Forum (WEF). To the WEF, a shortfall is anything less than what’s required to provide 70% of a person’s pre-retirement income via public pensions and private savings. (Americans are among the least prepared, falling some $137 trillion short.)

Retirement planning has a lot of moving parts, of course, including the amount you’ll save and the riskiness of your investments. These factors vary considerably around the world depending on the policies and options available. To avoid outliving your savings, here are a few key things to keep in mind:

1️⃣ Invest for the long term. Cash, because its investment return is pretty close to zero in most countries, is a risky option. To avoid having your savings eaten away by inflation, invest in a diversified portfolio—a mix of stocks and bonds, for example. Compounded interest can help you meet your retirement goals, potentially allowing you to retire earlier or to enjoy more income once you stop working. An annuity, which typically pays a fixed sum each year, makes sense for some people.

2️⃣ Figure out your cost of living. Put parameters around this cost and think about how long you expect to be in retirement: Increasing life expectancy has increased the duration of retirement for many people, meaning it may span 30 to 40 years, Crook said. Rising healthcare costs are a major concern—69% of Americans with a high net worth (more than $1 million in investments) say this is their biggest retirement worry, according to the UBS survey, compared with 47% in the UK and 35% in Germany. A healthy 65-year-old couple in the US should prepare to spend more than $260,000 on healthcare in retirement, according to Fidelity.

3️⃣ Decide on a plan for long-term care. Have a strategy to pay for things like nursing homes or in-home care, which can quickly drain a retirement portfolio, Crook said. Women may be more likely to require long-term care, as they tend to outlive male partners. Insurance makes sense for many people who aren’t wealthy enough to comfortably self-fund this potential expense. It also varies widely based on geography: Germany requires long-term care insurance. A healthy 65-year-old American couple could need $130,000 in additional savings for this expense.

4️⃣ Explain your plan to others. The best-laid retirement plan is of limited use if it is only known to you. An advisor or family member should be selected in advance, in case a time comes when you can’t make your own decisions. The people in this role need to know your wishes and have the authority to help carry them out.

With reporting assistance from Allison Schrager. 

John Detrixhe
Future of Finance Reporter
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