- Your ‘life expectancy’ could be longer than the average person.
- You have a 50% chance of living longer than your life expectancy.
- For a couple, the chance that one survives to a given age is higher than either individual.
- This ‘Longevity Risk’ must be taken into account when it comes to retirement planning.
How long should we expect to live?
People seem to like to talk about death even less than they like to talk about pensions1 so I thought I would break the ice and present my own life expectancy data courtesy of the Office of National Statistics (you can also check yours here). Here it is for a 48 year old male (me):
So, let’s look at my life expectancy graph. While my life expectancy is to the age of 84, I have a 50% chance of living longer! I have 25% chance of making it to 93, 10% to 98 and have an almost 5% chance of receiving a letter from the Queen.
On the other hand, it’s a very remote chance but I could get hit by the proverbial bus tomorrow. Early death is not the kind of risk that financial advisers spend a lot of time on when it comes to retirement planning (but they do when it comes to life insurance!).
“If we take a late retirement and an early death, we’ll just squeak by.“
From an investment perspective, living longer than your money lasts is referred to Longevity Risk. That is the risk that you hit the jackpot when it comes to your health but not when it comes to your pension. I have written on how we address this thorny issue (sometimes called the ‘nastiest problem in finance’) previously (https://clarawealth.co.uk/will-i-run-out-money-pension-drawdown/)
The Older, The Longer!
To make matters trickier, my life expectancy is one year longer than a 5 years younger version of myself. By surviving those 5 years, I have eliminated the risk of dying younger. Clearly a 100-year old is going to have a life expectancy of at least a 100!
Live Expectancy For A Couple
As a couple, the probability that one of you survives is higher than for the individual. From the perspective of saving for retirement, your funds are likely to have to last longer.
I ran the same life expectancy simulation for my wife as the one I ran for myself above. To reach the age of a 100 for example, she has a 7.5% chance while I have a 4.6% chance. However, the probability that at least one of us survives to a 100 is a fair bit higher and stands at 11.8%2! Those are certainly decent enough odds to warrant ensuring the retirement plan is robust up to that age.
Please contact me at Clara Wealth Management at firstname.lastname@example.org or on 0207 097 4968 if you want to discuss retirement planning or have any comments.
Pensions are long-term investments, the value of your investment and the income from it may go down as well as up. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.