Retirement Income

Longevity: Don’t plan for an average retirement

KEY TAKEAWAYS

  • Life expectancy is underestimated. 53% of retirees underestimated or did not know the life expectancy of a 60-year-old American.1
  • A simplistic approach to longevity planning may overlook a client’s health and lifestyle choices, which help determine a client’s lifespan.
  • It is critical we help investors understand a more complete view of their life expectancy probabilities and the implications for retirement income planning.

Americans are living longer than ever before. Everyone knows that, it seems, except investors! Retirees frequently underestimate their life expectancy and the number of years they are likely to spend in retirement. It is critical we help investors understand their accurate life expectancy and the implications for retirement income planning. While the uncertainty of longevity cannot be eliminated, we can plan and manage for it. Let’s discuss why longevity, as well as life expectancy, need to be more forefront in retirement income planning conversations.

Figure 1. Life expectancy of a 65-year-old married couple

This is a bar chart with three bars illustrating estimated life expectancy for a 65-year-old heterosexual married couple. The top bar shows that a 65-year-old male has a 50% chance of living beyond age 88 and a 25% chance of living beyond age 94. The middle bar shows that a 65-year-old female has a 50% chance of living beyond age 90 and a 25% chance of living beyond age 96. The bottom bar shows the combined life expectancy of the married couple, showing a 50% chance of living beyond age 94 and a 25% chance of living beyond age 98.

Source: Capital Group and American Academy of Actuaries and Society of Actuaries, as of September 18, 2023.

What is life expectancy in the first place? Life expectancy from birth tends to be the statistic we hear most often: a man or woman born in a certain year has X average life expectancy. This information has little relevance for someone reaching retirement age. For example, it makes no sense for a female who has reached age 84 to base their retirement-planning horizon on the statistical average life expectancy from birth of 80 years.2 For the purposes of retirement income planning, a more relevant statistic is life expectancy at attained age. In fact, an 84-year-old non-smoking woman in excellent health has a 50% life expectancy of about eight years and a 10% probability of living for another 16 years.The median life expectancy probability (50%) for both males and females at age 65 is into the late 80s and, for couples, one spouse is expected to live into their 90s, as shown in Figure 1.4 But this picture can also mislead planning for a retirement income horizon because these statistics are based on the median probability of the entire population. While the term lifespan refers to the maximum number of years an individual can live, life expectancy refers to an estimate or an average number of years a person can expect to live. Many of your investors may have a survival probability that is much longer than the median as there are large differences in life expectancy depending on various economic and demographic factors.

Figure 2: Planning horizon from attained age 65

This is a table showing the average life expectancy of male and female investors from the attained age of 65 with contributing factors that may increase or decrease the average life expectancy. The first row shows that a 65-year-old non-smoking female in excellent health has an estimated life expectancy of an additional 25 years, which is two years more than the average life expectancy for her demographic. The second row shows that a 65-year-old female smoker in average health has an estimated life expectancy of an additional 16 years, which is 7 years less than the average life expectancy for her demographic. The third row shows that a 65-year-old non-smoking male in excellent health has an estimated life expectancy of an additional 23 years, which is 2 years more than the average life expectancy for his demographic. The fourth row shows that a 65-year-old male smoker in average health has an estimated life expectancy of an additional 12 years, which is 9 years less than the average life expectancy for his demographic.

Source: Capital Group and American Academy of Actuaries and Society of Actuaries, as of September 18, 2023.

Contributing factors: OK if I smoke? To provide more perspective for clients, consider utilizing individual mortality factors such as gender, smoking choices and general state of health to sharpen the life expectancy probability.This will help to ensure the planning horizon matches up with their actual financial longevity risk and to provide your clients a more accurate picture of their retirement income horizon. For instance, suppose your investor is a 65-year-old woman who smokes and self-reports average health. Utilizing the Longevity Illustrator,6 she has a 50/50 chance of living at least another 16 years, to age 81, compared to age 90 if she were a non-smoker. But, as a smoker, she also has a 25% probability of living at least another 22 years, to age 87. And if she were a non-smoker, in average health, she would be likely to live another 29 years to age 94! This range illustrates the uncertainty surrounding how long someone might live and that longevity shouldn’t be viewed as a single point in time. These results may surprise many, considering that in a survey conducted by TIAA Institute, 53% of responders either did not know the life expectancy of a 60-year-old American, or underestimated it.Underestimation of life expectancy, together with having too short a planning horizon, can result in inadequate planning for retirement income needs. Incorporating contributing longevity factors beyond outliving the median statistics is a critical part of your client conversations.

Figure 3: Probability of living past of age 65

This is a bar chart showing the probability of a 65-year-old female living beyond the current age of age 65 based on smoking or non-smoking status and average health. The first bar is a grey bar representing the base case of 65 years old. The next set of bars shows that a 65-year-old non-smoking female in average health has a 90% probability of living an additional ten years to age 75, while a 65-year-old female smoker in average health has a 90% probability of living an additional four years to age 69. The next set of bars shows that a 65-year-old non-smoking female in average health has a 75% probability of living an additional 17 years to age 82, while a 65-year-old female smoker in in average health has a 75% probability of living an additional nine years to age 74. The next set of bars shows that a 65-year-old non-smoking female in average health has a 50% probability of living an additional 23 years to age 88, while a 65-year-old female smoker in average health has a 50% probability of living an additional 16 years to age 81. The next set of bars shows that a 65-year-old non-smoking female in average health has a 25% probability of living an additional 29 years to age 94, while a 65-year-old female smoker in average health has a 25% probability of living an additional 22 years to age 87. The last set of bars shows that a 65-year-old non-smoking female in average health has a 10% probability of living an additional 34 years to age 99, while a 65-year-old female smoker in average health has a 10% probability of living an additional 28 years to age 93.

Source: Capital Group and American Academy of Actuaries and Society of Actuaries, as of September 18, 2023.

Reframing longevity with your clients: While the uncertainty of how long someone may live cannot be eliminated, you can help investors better understand their own unique probabilities and develop plans to reduce the likelihood they will outlive their financial resources. 

KTEB

Kate Beattie is a senior retirement income strategist with 17 years of investment industry experience (as of 12/31/2023). She holds a bachelor’s degree in economics with a business administration minor from Colorado State University and holds the Certified Financial Planner™ and Retirement Income Certified Professional® designations.

TIAA Institute, Financial literacy, longevity literacy, and retirement readiness, 2022.

Social Security, 2020 Actuarial Life Table, as used in the 2023 Trustees Report.

American Academy of Actuaries and Society of Actuaries, Actuaries Longevity Illustrator, (accessed September 18, 2023).

Society of Actuaries and American Academy of Actuaries, Actuaries Longevity Illustrator. Based on a 65-year-old heterosexual non-smoking couple in excellent health (accessed September 18, 2023).

In terms of comparing your state of health to that of other people the same age and smoking status.

Relative to a client of same gender with average health and/or opposite smoking status.

American Academy of Actuaries and Society of Actuaries, Actuaries Longevity Illustrator (accessed September 18, 2023).

TIAA Institute, Financial literacy, longevity literacy, and retirement readiness, 2022.

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