Misunderstanding Life Expectancy

By Dan Slater

Misunderstanding Life Expectancy

MISUNDERSTANDING LIFE EXPECTANCY

Dan Slater

We have heard the saying many times there are two things certain in life: death and taxes. Why is it then, when it comes to such certainty, that the concepts used to estimate the timing of death is often misunderstood and oversimplified when it comes to planning for not outliving your money?

As an actuary, I will answer that question with one dreaded word, statistics. Many of us had to take that class, probably never enjoyed it, and in most cases tried to forget everything from it! We tend to simplify, yet protect, against things we don’t know – usually to a much safer level. But the exact opposite approach is generally taken with the potential of outliving money – people can make risky assumptions in their retirement strategies without knowing.

Let me share my insight on common conversations with financial professionals across the industry from the perspective of what longevity IS NOT.

1. Longevity is not life expectancy. You see it frequently, quotes from this table or that table. We try to understand a completely random event that stretches potentially beyond 40 years with a single age (your life expectancy). You’ve probably heard me mention this many times, but life expectancy is the average, or the middle, of an expected event. That means you have a 50% chance to pass away prior to that single age, but also have a 50% chance to live beyond that single age. Not very good “odds” when it comes to managing that risk, especially when many people spend way more time and energy managing risks into the 95% certainty range for other retirement risks…

2.So I just mentioned it above: this table or that table, which one is right?? Well my actuarial insight says…..ALL of them are right…but is it the right one for your specific client? Being in the annuity industry, I generally default to using a table that an insurance company feels identifies their population of client base – but that’s just me. And that is the Annuity 2012 table (A2012). We see all kinds of articles, or mentions of tables, such as the Internal Revenue Service (IRS), the Social Security Administration (SSA), or the Center for Disease Control (CDC) tables. While these are valid statistics, do they identify with your client situation? When you look at a national based table like these, they are including EVERYONE in the population, as in EVERYONE. That includes all people and walks of life. It includes those with money saved for retirement, as well as those that have no money saved up for retirement.

Gender    A2012          CDC         SSA           IRS

Male             22             17           18              21

Female        24             20           20             21

65 year old calculated life expectancies

Source A2012Source CDCSource SSASource IRS

Some tables don’t even distinguish between male or female. I’m sure they have their reasons, but the IRS tables do not lend to the fact that females have a longer life expectancy than males. Sorry ladies, you will be forced to take your Required Minimum Distributions from your qualified accounts at the same pace as men, even though you need to make your money last longer.

The often missed or overlooked statistic is looking at the life expectancy of a single life, or both couple’s lives. It’s a tricky thing but you should not look at the life expectancy of both spouses separately. Based on the Annuity 2012 mortality table, a 65 male has 22 yrs, and a 65 female has 24 yrs, so logic makes you think the joint life expectancy of the couple is somewhere north of 22, but probably south of 24, so maybe the average of 23 yrs. Yet in reality a joint couple has a life expectancy of 27 yrs. This means at least one of the two has a 1 in 2 chance of outliving 27 years., a 1 in 4 chance of outliving age 97 (or 32 years), and a 1 in 8 chance of outliving age 99 (34 yrs).

How confident do you want to be in helping to ensure your clients will not outlive their money? I encourage you to become more informed and more educated on what it really can potentially mean to “outlive”, not just a life expectancy, but more the broader spectrum of longevity. Rest easy, you don’t have to become an actuary, just call Core!

Dan Slater, FSA, MAAA

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15751-4/12/13

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