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Why Is It Necessary To Consider Life Expectancy In Retirement Planning

The life span is increasing with advanced healthcare and accessibility, and improved finances. That’s why it is so important to consider rising life expectancy while planning for your retirement

Versha Jain
August 12, 2023
Consider Life Expectancy In Retirement Planning

Consider Life Expectancy In Retirement Planning

Lately, a message has been circulating on social media where a handwritten note by a 32-year-old doctor shows retirement planning with calculations.

Interestingly, the Reddit user while calculating the retirement corpus took into account everything starting from inflation, return on investment before retirement, and return on retirement corpus, among others.

However, one reader commented on the message that these are only expected returns, and unless these are guaranteed, these cannot be predicted. The health issues growing with age also are not addressed along with many other expenses, such as vacations, home, and buying a car.

What caught the attention here was that the doctor had assumed a life expectancy of 90 years in the retirement planning calculation.

Why Should You Consider Increasing Life Expectancy In Retirement Planning?

Nidhi Manchanda, certified financial planner (CFP), and chartered wealth manager (CWM), says that as people are living longer on an average, they now face the challenge of funding longer retirement periods. This makes it necessary for them to accumulate more savings to sustain their lifestyle in their retirement years when they won’t have a steady income, she says.

A recent study by the TIAA Institute in the US also found that people who underestimate their life span are not prepared to finance their retirement for life.

Let us see how increasing life expectancy can affect one’s retirement planning.

Says Manchanda: “Let’s assume an individual aged 30 years with monthly expenses of Rs. 50,000. If he aims to retire at the age of 55 years, then taking into account a projected lifespan of 75 years and factoring in inflation, the estimated retirement fund needed would be approximately Rs. 4.3 crore.”

“However, if we extend the assumed life expectancy to 80 years while keeping all other factors constant, the required retirement corpus would rise to around Rs. 5.1 crore. This clearly demonstrates that an extended life expectancy significantly impacts retirement planning, thus necessitating a larger financial cushion to cover additional years of sustenance,” she says.

Incidentally, five additional years of retired life means a requirement of an extra corpus of Rs 80 lakh (Rs 16 lakh per year). This proves why it is necessary to consider life expectancy while planning for retirement.

What Should You Do To Ensure Financial Security?

The large sum needed per year requires early planning as well as sticking to it until your retirement. At times, people have to consider delaying their retirement so that they can accumulate a sufficient amount in savings to last them.

To secure your retirement financially, first, you need to estimate life expectancy, which depends on various factors, such as the demographic region you live in, your family’s health history, your lifestyle, and access to healthcare, says Manchanda.

On managing different products of insurance and investment, she suggests, to begin by creating a comprehensive budget that covers essential and discretionary costs.

“Prioritise necessary insurance coverage to address potential healthcare expenses. Include these expenses while estimating the required retirement corpus and start investing accordingly,” she adds.

Lastly, one should take adequate care to properly diversify one’s investments so that it can generate inflating-beating returns.

So, as the Reddit user’s suggested, do not forget to include inflation in your financial planning. Also, give health insurance a priority and get a policy to cover critical illnesses, too.

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