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How long are you likely to live? [ClearOnMoney]
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Commentary

How long are you likely to live?

12 Feb 2011 by Jim Fickett.

Life expectancy is too coarse a measure for retirement planning. Period life tables enable you to quantify your chances of living to any particular age. When saving for retirement, your either need a plan where someone else agrees to supply income as long as you live, or you need to work until you have savings that could last into your nineties.

When saving for retirement, you need to have a guess about how many years you are going to live. Most commonly, one uses the idea of life expectancy. But this is just an average. While it provides a guideline, most likely you will live to some different age than that indicated by your life expectancy.

In the popular literature on planning for retirement, the possibility of outliving your money is often mentioned, but no quantitative data are given. Here I attempt to remedy that, i.e. to answer the question, just how likely is it that you will outlive your savings, and by how much?

The key data are found in “period life tables”. The word “period” indicates that all the data are based on mortality data from a particular period. Most interesting for the present purpose, such tables compound the probability of surviving through each particular life year, to give the fraction of people likely to survive to each age.

The Centers for Disease Control and Prevention have a National Center for Health Statistics that publishes such tables (the Social Security Administration also has its own version). It takes a long time for the data to filter through the pipeline, so the 2010 publication from CDC uses 2006 mortality statistics.

Here is a little more detail on the concepts, from the CDC paper:

There are two types of life tables—the cohort (or generation) and the period (or current). The cohort life table presents the mortality experience of a particular birth cohort, all persons born in the year 1900, for example, from the moment of birth through consecutive ages in successive calendar years. Based on age-specific death rates observed through consecutive calendar years, the cohort life table reflects the mortality experience of an actual cohort from birth until no lives remain in the group. To prepare a single complete cohort life table requires data over many years. It is usually not feasible to construct cohort life tables entirely on the basis of observed data for real cohorts due to data unavailability or incom­pleteness. …

Unlike the cohort life table, the period life table does not represent the mortality experience of an actual birth cohort. Rather, the period life table presents what would happen to a hypothetical (or synthetic) cohort if it experienced throughout its entire life the mortality conditions of a particular time period. Thus, for example, a period life table for 2006 assumes a hypothetical cohort subject throughout its lifetime to the age-specific death rates prevailing for the actual population in 2006. The period life table may thus be characterized as rendering a ‘snap­ shot’ of current mortality experience, and shows the long-range impli­cations of a set of age-specific death rates that prevailed in a given year.

The data I used are those of most interest to me personally, from Table 5 on p15 of the report, “Life table for white males: United States”. If you are not a white male there are other tables for other groups.

Assuming that one retires at about age 65, the following graph shows the fraction of people, from an initial cohort of people aged 65, who survive to each age beyond 65.

The CDC report gives a life expectancy, for white males aged 65, of 18.6 years, i.e., to about age 84. However you can see from the above graph that your chances of living longer than that are about half, and your chances of living to age 93 are one in ten. For those depending on a fixed pool of savings, having a one-in-ten chance of 9 years' worth of unexpected expenses is too big a chance to take.

The first lesson from this is that, if you use life expectancy for retirement planning, the likelihood of running out of money too soon is quite significant. So you really need to either

  1. Be lucky and have a defined benefit retirement plan, or
  2. Buy annuities and let an insurance company worry about how long you might live, or
  3. Build up enough savings to last into your nineties

The second lesson is that, if you are in the savings group, you probably need to work longer and retire later than at age 65. Using 93 as a planning age, few people have both the means and the discipline to save 28 (93 minus 65) times annual expenses.