The “115″ Plan: Better Than Conserving Principal

Lifespan has increased substantially in the past century, causing sea changes in social and financial norms. Longer lifespans skew the demographics between workers and retirees, affect the viability of government benefits, alter the time frames for work and retirement, and present a different set of health and lifestyle challenges compared to previous eras. But even as life expectancies keep inching up, it is also accurate to say people are not living longer.

Maximum Age: Stuck at 115

Sampling from large groups of people born at the same time, demographers record (or estimate) the ages at which each person dies. Apart from irregular catastrophic events, like a war or a pandemic, the shape of the distribution is essentially the same for all age groups: A long period of low mortality, followed by a period when the majority of the population passes, then a trickle of deaths each year until the last of the cohort is gone. (see Fig. 1)

In every group born at the same time, there will be one person who is the last to die. Theoretically, this person, due to their good health and good luck, represents the “maximum age” for their group. If everyone in the group was as healthy and fortunate, they would live to maximum age. In Fig. 1, the last person in the group dies at 115.

There’s an interesting thing about maximum age: Regardless of the shape of the distribution curve for a particular group, every distribution ends at 115; maximum age hasn’t changed in the past century (and perhaps not much in the last two millennia).

Based on verifiable records going back to the late 1800s, the oldest person from every age group has lived to about 115. Wikipedia maintains lists of “Verified Oldest People” and “Verified Oldest Living Person.” Overwhelmingly, their lives ended at 114 or 115. The few individuals who lived beyond 115 are so rare as to be statistically insignificant.

Age 115 as a Planning Benchmark

Increasing life expectancies are primarily the result of medical advances; ailments that were once fatal can often be cured or managed to extend life. But thus far, these advancements have not been shown to push the maximum age for healthy people beyond 115. This is relevant to retirement planning.

Some retirement scenarios project a systematic draw-down of accumulated assets, calibrated to an estimated life expectancy. The goal is maximum distributions, while ensuring there will be enough to last a lifetime, however long that may be.

Knowing that life expectancies are inching upward, and that future medical breakthroughs might bring additional jumps in lifespan, selecting a distribution plan at 60 or 65 for the rest of your life can be a daunting task. A drawdown plan projected to last to age 95 might seem overly conservative – unless you end up living past 100 because of some yet-to-be discovered procedure or medication.

Surveys show this uncertainty about life expectancy causes many retirees to revert to distribution strategies that conserve principal. This approach ensures money will be available no matter how long they live, but also dramatically reduces income. Conserving principal is a distribution plan for eternity, one that is extremely inefficient if retirees don’t live forever. And they don’t.

For at least the past 150 years, 115 is a hard ceiling for life expectancy. For retirees, this means a draw-down plan that lasts to 115 is arguably just as safe as conserving principal for ensuring retirement income will last as long as you do. The only difference: the distributions are higher. And this certainty holds true whether retirement starts at 60 and might last 55 years, or at 80, and you die the next day. A projection that ends at 115 is safe at all ages and every health condition.

Once you have a draw-down calculation based on living to 115, use the same lump-sum accumulation in a quote for an annuity that promises a guaranteed lifetime income. If nothing else, the comparison will help you quantify the benefits of using an insurance company to spread your longevity risk, as opposed to taking responsibility for the same guarantees using just your assets and personal money management acumen.

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