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Underestimating This Key Retirement Figure Could Cost You Thousands of Dollars

By Katie Brockman – Sep 19, 2019 at 5:53AM

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Too many workers are making this major miscalculation.

Saving for retirement can be intimidating, especially when there are so many factors you have to think about. Between figuring out how much you should save, deciding what age you should retire, and considering how much you can depend on Social Security, retirement planning isn't easy.

It's important to think about all these factors before you retire; overlooking even one can spell disaster and throw off the rest of your plans.

Even if you think you're doing a good job of preparing for anything life can throw at you, there's one commonly ignored factor that can make or break your retirement: life expectancy.

Senior couple sitting on a bench at the beach

Image source: Getty Images.

How life expectancy impacts your retirement plan

As you near retirement, your life expectancy is probably the last thing you want to think about. Right now, you're focused on all the ways you want to enjoy retirement, not your final years. But life expectancy has a bigger impact on your retirement plan than you may realize.

The average 65-year-old man and woman can expect to live until around age 84 and 86, respectively, according to the Social Security Administration. But it's estimated that a third of today's 65-year-olds will make it past 90, and one in seven is expected to live past age 95. That means if you retire in your mid-60s, there's a good chance you might spend at least 25 to 30 years in retirement. If you're not preparing for that possibility now, you could be in a heap of financial trouble later on.

Underestimating life expectancy is a common problem among workers saving for retirement. Approximately two-thirds of men still in the workforce underestimate the average life expectancy, according to a survey from the Stanford Center on Longevity, as do roughly half of women. Retirees are paying the price for this mistake, too; the average American retirees are expected to outlive their savings by approximately 10 years, a report from the World Economic Forum found.

If you run out of savings when you're already deep into retirement, you don't have many options. You likely won't be able to go back to work in your 80s or 90s, so you may have to scrape by on Social Security alone. But considering the average benefit is just $1,471 per month, that doesn't give you much to work with -- especially with healthcare costs and long-term care expenses eating away at your budget as you age.

Estimating your life expectancy decades before you even retire may seem pointless, because anything can change in that much time. But getting as accurate an idea as you can of how long you expect to live will pay off later.

Preparing for retirement with life expectancy in mind

You don't need to know exactly how long you'll spend in retirement (nobody can predict their life span that accurately), but a general idea is better than winging it and hoping for the best. Especially as the average life expectancy continues to increase, underestimating it by several years can potentially result in falling hundreds of thousands of dollars short.

For example, say you plan to spend 20 years in retirement, and you expect to spend around $40,000 per year. You might go through your entire career saving hard for the future, thinking you're right on track because you're reaching your goals. But if you actually end up spending 30 years in retirement, that's an additional $400,000 in savings you didn't plan for. And at that point, it's likely too late to make any corrections and save more.

When you're thinking about how many years you expect to spend in retirement, look at your health status and your family history. If you're in peak physical shape and your family members have a history of living long lives, it's a safe bet that you'll likely enjoy several decades in retirement. But if you're battling health issues now or have a family history of certain illnesses, you may not have to worry as much about planning for a long retirement.

Either way, it's safer to err on the higher side. If you save more than you need, you'll be able to splurge in your final years. But if you underestimate this figure, you might spend those years struggling to make ends meet.

Nobody wants to think about the end of their lives as they're preparing for retirement, but if you want to ensure you're doing everything possible to make your money last as long as you do, it's crucial to consider. It will make the rest of your life much easier.

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