Don’t Know How Long You’ll Live in Retirement? Another Good Reason to Build a Robust Floor Portfolio to Fund Your Essential Expenses

This post is a follow-up to our post of September 14, 2021 entitled; “How Long Should You Plan to Live?” In that post, we advocated using our “default” assumption of the 25% probability of survival from the Actuaries Longevity Illustrator for non-smokers in excellent health when planning for your retirement. In this post, we look at the planning implications of using shorter or longer Lifetime Planning Periods (LPPs) than our default assumptions in your retirement planning. Based on our brief analysis, we believe that, for most reasonable LPP assumptions, it still makes sense for you to use the Safety-First InvestmentStrategy to build a robust Floor Portfolio comprised primarily of non-risky investments like Social Security, pensions and life annuities to fund your future expected Essential Expenses. Using this strategy and these types of investments will better enable you to match your non-risky investments with your essential expenses over your remaining lifetime, however long that period may turn out to be.

How Long Should You Plan to Live?

One of the most important assumptions you need to make when planning for your retirement in today’s low-interest rate environment is the expected length of your lifetime.  If you are married, you may also need to make assumptions with respect to how long your spouse may live, how long you both will be alive, and how long just one of you will be alive.  We call these assumptions your Lifetime Planning Periods (LPPs).  Note that an LPP is not how long you (or your spouse) expect to live (life expectancy), but a period, generally longer than life expectancy, to which you conservatively plan to live to avoid outliving your assets (or, alternatively, to reduce the need to significantly cut back essential spending if you live “too long”).  These assumptions can have a significant impact on spending and investment strategies that you may employ in retirement and can affect many of your retirement-related decisions.

“Immunize Then Optimize”—Different Names but Same Planning Concept as Funding Your Floor Portfolio First Then Your Upside Portfolio Second

Thanks again to Christine Benz, Director of Personal Finance at Morningstar for another informative article on retirement planning. In her September 3, 2021 article entitled For Retirement Portfolios, 'Immunize Then Optimize', she and Jeff Ptak interviewed author and investing expert Michael Falk on a number of investment and planning related subjects, including “how retirees and pre-retirees should be operating in this environment and the steps they can take to ensure the success of their plans.”