Retirement Mistake #5: Underestimating Life Expectancy

Not only are we living longer, but we are living healthier lives.  When planning for retirement, what age should one project as the end-of-life year?  When running out retirement projections using the Monte Carlo calculations within the Quantext Portfolio Planner software, I use 100 as the end-of-life year when testing the probability of running out of money.  There are many assumptions that go into this calculation,  Here are a few.

  • Projected retirement age
  • Current portfolio value
  • Construction of portfolio
  • Inflation rate
  • Projected growth rate of S&P 500
  • Required income during retirement years
  • Level of acceptable risk

To view what a projection might look like, we can take the recent portfolio we are using in the optimization study.

Assumptions:  Here is a screenshot of the basic assumptions used for this calculation.

ITA 07 Feb. 08 03.19

Projections:  Based on the portfolio we have been using for the optimization study, below is the Monte Carlo calculation for retirement.  Note the 50% chance of running out of money by age 96.  Using the life expectancy age of 100, this portfolio is cutting it a little close.  I prefer to not push poverty by seeing a 20% to 30% chance of coming up short by age 100.  This portfolio, with the associated assumptions, is not too far off the mark.

ITA 06 Feb. 08 03.18

About Lowell

Retired physics teacher. My hobbies are photography, reading and classical music. And my latest hobby - taking care of my dog, Kipling.

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