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  Time Horizon  

Budget planning and investment portfolio decisions need to be made within the context of a "planning horizon" or "time horizon", which is a euphemistic way of posing the question: "How long do you plan to live?"   Having a good answer to this question is essential to making sure you do not outlive your assets.  Your answer will also help determine the amount of your portfolio that can be invested in equities.  Since equities may, in a given time period, have significant declines, your own investing time horizon needs to be long enough to weather these downturns and not be forced to sell at lower prices.  This is the only way to ensure reaping the higher, inflation-beating average returns that equities have traditionally generated over the longer-term.

Three tools for estimating life expectancy are presented below.  We recommend using these tools and applying your own judgment factor.  The Life Expectancy Tables simply  describe the 50/50 probability of your life expectancy at any given age.  If one only used that as a planning horizon the odds are even that you will live longer than that age.  More  useful is the second tool, "Plan for a Long Retirement" that allows one to computer the probability  of achieving any given age.  We advocate planning for a time horizon at least within a 15% probability of not being exceeded.  The third tool, "Living to 100" is based on research that takes into account health and lifestyle factors.  And by the way, research indicates that individuals have very good instincts about their own longevity.

 Life Expectancy Tools

Life Expectancy Tables

Provided by the U.S. Dept. of Health & Human Services, these tables indicate average life expectancies for American males and females.

Plan for a Long Retirement

Offered by Vanguard, this calculator refines life expectancy tables by calculating the probability that you and / or your partner will exceed your life expectancy.  This is an important variable for testing the likelihood that you will outlive your financial assets.
Living to 100 Life Expectancy CalculatorOffered by Thomas Perls, MD, MPH, founder and director of the New England Centenarian Study, this calculator asks 40 questions that take into account your health and lifestyle in estimating life expectancy.

Once you have an estimate of longevity, you are ready to formulate your investment policy.


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