The Final Quarter: Your Retirement Plan is Likely Short-Changing Your Health

Eating a healthy diet, exercising regularly, and getting enough sleep – we all know these are bedrocks of better health. Another fact of life: wealthy people not only live longer, but have more healthy, fully functional years, because financial security leads to better health outcomes. I will leave the discussion around the deep flaws and inequities in the American healthcare system as the cause of this dynamic to others who are more qualified and stick to what I know: the data is becoming even more clear, and the impacts even more stark around the direct impact of changes in income and net worth on physical health and longevity.

While most conversations tend to focus on life expectancies, the reality is Americans care more about healthspan – the length of our healthy years that we can enjoy. Research indicates the average American values just one additional year of healthy life at $242,000, which is more than three times the average income of those over age 65. It's a telling datapoint on the value the American population places on feeling good and able-bodied, and it also emphasizes the value of financial retirement plans that provide adequate income and annual resources that can help extend our healthy years.

But there is a serious, structural, and widespread problem with retirement planning. The good news is this is curable, the bad news is almost no one is paying attention.

The problem is most retirement plans are built with the wrong target date, ignoring an individual’s life expectancy in favor of an arbitrary date when someone believes they may retire. On their face, target date retirement plans appear as a sound approach. Overwhelmingly though, they do not take into account what happens post retirement. The number one fear of retirees is outliving their retirement income.

Much of the industry has accepted as gospel the four percent withdrawal target framework popularized in the 1990s, whereby retirees are instructed to take four percent of their portfolio each year. This approach just doesn’t make sense as it does not account for the knowable differences in expected longevity for each individual plan holder. The 4% withdrawal target may assume a far longer than statistically sound lifespan for the retiree. An artificially extended lifespan advantages the financial institution not the investor by making points on the assets under management, as more cash stays in the fund, as opposed to being distributed to the retiree. These withdrawal frameworks should not be standardized, but designed for the individual using the most important piece of the equation – lifespan.  

By ignoring lifespan, current retirement planning best practices actually shorten the lifespan and healthspan of the retiree, who is being shortchanged in annual available income because lower income and related stress can have a negative impact on health outcomes. 

We recently worked with a client who was 76 years old with a health profile that indicated a clear likelihood of lifespan of an additional 8-9 years. Yet his retirement plan was positioned using an average lifespan to age 95 or an additional 19 years. By matching the lifespan to the distribution, this client almost doubled their monthly withdrawals from their retirement savings.  While still leaving a significant amount of funds remaining to manage lifespan extension and other potential costs.  That money could be going towards more activity, more social interaction with family, access to healthier, fresh food, access to light exercise and more. All of which would create more able, healthy, enjoyable years for this client.

We know target date funds and financial planning models are being set incorrectly because our company is in the business of deeply understanding longevity. For the last two decades, we’ve built tools using an extraordinarily wide and granular set of data to calculate life expectancies with remarkable accuracy. And when I see retirees’ financial plans or other financial structures, it's breathtaking how often the most important underlying assumption – how long the retiree will need resources – is not included in the plan.

By no means am I advocating that retirement plans should be set up to deliver overly-aggressive distributions – the money needs to last. But target dates set without use of hard reliable lifespan data are quite literally shortchanging retirees' health and lives. 

Retirees and their financial professionals should regularly review retirement plan structures to ensure accurate assumptions around the life expectancy of their clients are established correctly for the benefit of the retiree and their health and well-being.

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