A new paper says that retirement planning shouldn't be based only on chronological age, but also on biological age—and that in the future, the biological age factor may become more prominent in retirement policy.
The paper "is inspired by the growing body of medical literature that has identified biomarkers of aging which—practically speaking—offer better estimates of expected remaining lifetime and future mortality rates."
It proposes that biological age could be used in the future, when adequate technology can calculate it, to determine not just retirement policy but also optimum spending levels in retirement, thus allowing better retirement planning.
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In a blog post, one of the study's authors, Professor M.A. Milevsky of York University in Toronto, points out that "the widely used and advocated 4 percent rule of retirement income planning—which says that you should spend 4 percent of your nest egg per year and adjust for inflation—completely ignores the entire literature on aging and can result in a large disruption to your standard of living."
Milevsky also highlights the differences between a healthy 65-year-old who physically might be more like 50 and one whose physical condition places him closer to 70, and says that the fact that 65 is considered retirement age has one collecting a pension "for what could be another 40 or 50 years," while the other might end up shortchanged because of health reasons.
More to the point for retirement planners, the paper offers the example of calculating a withdrawal, or spending, rate for an individual of 5 percent at age 65 that allows him to take $50,000 per year from a total net worth portfolio of $1,000,000.
But, the paper says, "Ten years later the same 75 year-old might continue to withdraw at the rate of $50,000 per year from his or her portfolio, but if the value of the portfolio has declined to $500,000 (for example), the spending rate at age 75 is (obviously) now 10 percent."
And while the first is already a higher drawdown rate than the recommended 4 percent, the latter, at more than double, is certainly not sustainable.
Spending rates that vary according to biological, rather than chronological, age can throw off retirement planning based on chronological, rather than biological, age.
This can be the case for retirees who failed to plan for high health care expenses in retirement, although a biological age basis for their planning might have better prepared them to do so.
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