How Far Out Should My Financial Plan Go?

Let’s face it. This is just a euphemistic way of asking the question, “How long should I assume I (or my spouse/partner) will live?” While it may make us a bit uncomfortable, we must not shy away from it, assuming we want to produce the most valuable plan possible. In our lifetimes, we have seen tremendous advancements in healthcare leading to increased longevity.  For a couple at age 65, the table below shows the probability of living to ages 80, 90, and 100.

Source: Human Mortality Database, University of California, Berkeley, and the Max Planck Institute for Demographic Research, 2009.

If we apply some basic math to the numbers above, we obtain the following probabilities for at least one member of the couple living to each of the ages.

Clearly, the planning horizon for this couple should be at least 25 years (to age 90), and 30 years is quite reasonable. Furthermore, given further improvements in mortality likely to occur over the next few decades, one could easily argue for 35 years. Of course, the further out we go, the less likely it is that the couple’s investments will last the full duration. The good news, however, is that with a well thought out plan, corrective actions can be taken early in the game so that a catastrophic outcome can be avoided.

One important aspect of financial projections (and I know this first-hand from my experience as an actuary) is that their accuracy varies inversely with their duration. I distinctly recall pulling out 10-year projections that were done 10 years ago (by someone else) and having a good laugh. Of course, when my tenure got to the point that I was looking at my own projections, it wasn’t that funny anymore.

Returning to our original question of how far out your financial plan should go, at Clarity Capital Advisors we begin with the recommended default assumptions in MoneyGuidePro of males living to age 90 and females to age 92. If warranted, we can modify those assumptions in either direction. As with all or our assumptions such as future investment returns, our goal is to create a realistic plan that will be regularly updated to reflect the changes in both your finances and in your life.