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Budget planning and investment
portfolio decisions need to be made within the context of a "planning horizon" or "time
horizon", which is a euphemistic way of posing the question: "How
long do you plan to live?" Having a good answer to this
question is essential to making sure you do not outlive your assets.
Your answer will also help determine the amount of your portfolio
that can be invested in equities. Since equities may, in a given
time period, have significant declines, your own investing time
horizon needs to be long enough to weather these downturns and not be
forced to sell at lower prices. This is the only way to ensure
reaping the higher, inflation-beating average returns that
equities have traditionally generated over the longer-term.
Three
tools for estimating life expectancy are presented below. We
recommend using these tools and applying your own judgment
factor. The Life Expectancy Tables simply describe the
50/50 probability of your life expectancy at any given age. If
one only used that as a planning horizon the odds are even that you
will live longer than that age. More useful is the second
tool, "Plan for a Long Retirement" that allows one to computer the
probability of achieving any given age. We advocate
planning for a time horizon at least within a 15% probability of not
being exceeded. The third tool, "Living to 100" is based on
research that takes into account health and lifestyle factors.
And by the way, research indicates that individuals have very
good instincts about their own longevity.
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Life
Expectancy Tables |
Provided by
the U.S. Dept. of Health & Human Services, these tables
indicate average life expectancies for American males and
females. |
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Plan for a Long Retirement |
Offered by Vanguard, this calculator refines life
expectancy tables by calculating the probability that you and
/ or your partner will exceed your life expectancy. This
is an important variable for testing the likelihood that you
will outlive your financial
assets. | | Living to 100 Life Expectancy Calculator | Offered
by Thomas Perls, MD, MPH, founder and director of the New England
Centenarian Study, this calculator asks 40 questions that take into
account your health and lifestyle in estimating life expectancy. | |
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Once you have an estimate of
longevity, you are ready to formulate your investment
policy. |
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