How to better estimate life expectancy

How to better estimate life expectancy
Gauging how long your clients will live has major consequences for retirement planning.
FEB 22, 2015
Retirement planning is based on a significant number of assumptions. And from market movements to investor preferences to individual life spans, uncertainty reigns. It's the job of financial advisers and other investment professionals to bring some order to the chaos. We can't predict the market, but we can help ensure that our investments have the right mix of forecast risk and return. We can measure investors' risk preferences, even as they change over time. And we can shed some light on when a person might be expected to die. It's a delicate matter, but one with major consequences on retirement planning, one in which we need to be as accurate as possible. (More: Finding solutions to the key challenges of modern retirement) Here are a few guidelines when estimating a life span for yourself or a client. First, life span is personal, but the estimation tools are not. Second, conservatism rules: It's far better to die with money in the bank than to live one's later years in poverty. And third, probability is the antidote for uncertainty. Let's take those in order. Generic tools have value. We know from actuarial tables, for example, that people are living longer on average. For example, in 1980, the life expectancy for a 65-year-old man was 14 years; it's now closer to 18 years, according to Social Security Administration data. That means the duration of retirement is increasing. Also, older people are dying later and fewer people are dying early — both of which raise the average life span. We expect a baby born today to live an average of 79 years, while the average 65-year-old man is expected to live to 83. PERSONAL DETAILS The problem, of course, is that very few people are average. If your father died at 50 and your mother lived to be 100, should you expect to live to be 75? When estimating an individual's life span, it is important to consider personal details, such as family longevity, medical history, relevant habits (smoking, diet, exercise) and environment (stress, marital status, etc.). This is inexact, but if all these factors point to a longer life, this should inform your estimate. It's also useful to point out that richer people tend to live longer. While not every financial planning client is a “one percenter,” recent research suggests that wealthier individuals as a group are generally well above average from a longevity perspective. This life expectancy gap for wealthier people is widening, particularly among women. All of that argues for taking a more conservative approach to estimating life expectancy and the length of retirement. In my research, I gravitate toward annuity mortality tables, which usually are more conservative than regular mortality tables because of adverse selection. People who buy annuities are likely to be healthier than average and therefore live longer. A mortality table I've been using recently is the 2012 Individual Annuity Mortality created by the Society of Actuaries. PROBABILITIES RULE These tables help make our estimates more precise, as they provide more accurate longevity probabilities than a traditional mortality table, such as the Social Security Administration mortality table. (More: Declining marriage rates present a planning puzzle for long-term couples) For example, the odds that either member of a couple, male and female 65-year-olds, will live past 95 is only about 20%, which makes a 30-year retirement period seem reasonable. Based on the annuity mortality table, however, this probability increases to about 43% when both spouses are 65 today, and is projected to rise to over 50% in about 15 years. In other words, there's a 50/50 chance that either member of a couple of 50-year-olds planning to retire in 15 years will live more than 30 years after retirement. Therefore, the safety of a 30-year retirement (or assuming death at 95) varies significantly based on your assumption. There are no easy answers when predicting retirement periods. But make it personal, stay conservative and lean on probability. David Blanchett is head of retirement research at Morningstar Investment Management.

Latest News

Northern Trust names new West Region president for wealth
Northern Trust names new West Region president for wealth

The new regional leader brings nearly 25 years of experience as the firm seeks to tap a complex and evolving market.

Capital Group extends retirement plan services further with a focus on advisors
Capital Group extends retirement plan services further with a focus on advisors

The latest updates to its recordkeeping platform, including a solution originally developed for one large 20,000-advisor client, take aim at the small to medium-sized business space.

Why RIAs are the next growth frontier for annuities
Why RIAs are the next growth frontier for annuities

David Lau, founder and CEO of DPL Financial Partners, explains how the RIA boom and product innovation has fueled a slow-burn growth story in annuities.

Supreme Court slaps down challenge to IRS summons for Coinbase user data
Supreme Court slaps down challenge to IRS summons for Coinbase user data

Crypto investor argues the federal agency's probe, upheld by a federal appeals court, would "strip millions of Americans of meaningful privacy protections."

Houston-based RIA Americana Partners adds $1B+ with former Morgan Stanley director
Houston-based RIA Americana Partners adds $1B+ with former Morgan Stanley director

Meanwhile in Chicago, the wirehouse also lost another $454 million team as a group of defectors moved to Wells Fargo.

SPONSORED How advisors can build for high-net-worth complexity

Orion's Tom Wilson on delivering coordinated, high-touch service in a world where returns alone no longer set you apart.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.