The life expectancy of a couple is much longer than any pair of individuals – more than a decade longer. If you’re taking responsibility for a retirement plan [1] for two, you need to know what the odds are that both or one of you may make it to a ripe old age. Long life can drain your portfolio like Facebook drains the battery of an aging smartphone.
We’ve already looked at how to find good life expectancy data [2] for individuals. But we need to go one step further to see how two hearts make one financial strategy.
(This counts for romance on Monevator.)
Survival probability
When you’re joined at the financial hip, it’s a big mistake to look at life expectancies separately. This table from a retirement research paper [3] by Dr Paul Cox of the Birmingham Business School shows why. For a heterosexual couple:
[4]Source: Helping consumers and providers manage defined contribution (DC) wealth in retirement, 2015. Dr Paul Cox.
The 50% chance that one of our two lovebirds still needs money by age 95 is much higher than the 33% probability for females, or the mere 25% for the males circling the drain.
And that’s for a UK couple born in 1950 who’ve reached age 65. For a matching set of Gen Xers, born in 1970, Cox calculates that the chances of one of them still being in business at:
- Age 95 = 60% probability
- Age 100 = 36% probability
Cox thinks the probability of one member of a couple surviving to age 95 and 100 is increasing by 3% every five years.
So individual life expectancies fly about as well as a paper aeroplane. Gambling your future security on a 50-50 bet of making age 95 won’t look smart if there are still bills to pay, your portfolio has waned, and you haven’t had the decency to fall off the log yet.
We need to settle upon a pragmatic degree of failure. For example:
“We’ll plan for a 50-year retirement because we accept a 10% chance that one of us will stagger on beyond that point, and a 90% chance that neither of us will.”
Then we need to personalise those odds with a projection of our shared life expectancy.
Enter the Longevity Illustrator
The Longevity Illustrator [5] constructs survival probabilities for couples using US Social Security data. That’s good enough for our purposes – we’re looking for a plausible time horizon not a palm reading.
Enter your age, gender, and health deets, then watch your possible futures unfold in a few graphs.
Here’s the key table for an everyday couple – retirement planning obsessive, The Accumulator, and reluctant financial case study, Mrs Accumulator:
[6]Our acceptable failure rate is 10%. The bottom row shows a 10% chance that one of us will last 50 years beyond our retirement date. I accept that Mrs Accumulator is the bookies’ favourite.
There’s a 10% probability that both of us could last 42 years. I need to target a portfolio size and sustainable withdrawal rate (SWR) [7] that can provide a dual income for at least that long.
It does sting a little to see there’s only a 50:50 chance we’ll both be around for 30 years. We’d better make the most of the time we have.
Dr Cox’s work helps us put some UK context around that table:
Between ages 80 – 84 two thirds (65%) of all men and one-third (30%) of women are part of a couple. At age 85+ one-half (48%) of all men and 1 in 8 (13%) women are part of a couple.
The large drop in the proportion of women living in a couple is because the proportion of widowers rises.
This life expectancy post [2] explains how to find UK mortality data suitable for your year of birth if you want to go the extra mile. You can calculate your own survival probabilities with the formula I’ll share in a bonus appendix below.
You should reduce your SWR [8] if you need to live off your portfolio much over 30 years. There’s good evidence you should increase your equity risk if you want your wealth to last 40 to 60 years [9].
What does failure look like?
It’s important not to overdo fears of eating dog food in retirement. Failure rarely looks like bankruptcy. In practice the chance of living long enough to run out of money is smaller than it seems because it depends on two events:
The probability that your portfolio fails.
And
The probability that someone is left alive to rue the day.
For example:
There’s a 10% chance that one of you survives 50 years.
There’s a 10% chance your portfolio runs dry given your chosen SWR [8].
The probability that both events occur together is 0.1 x 0.1 x 100 = 1%.
That’s a 99% success rate. That’ll do me.
Besides, even a 1% fail case doesn’t necessarily mean you run out of money. It means you’ll need to lower your spending along the way to prevent your portfolio ebbing away.
That will probably happen naturally when your portfolio only has to support one of you – assuming your next move isn’t to shack up with some asset-less Condo Casanova. (I recommend prohibiting that in your relationship agreement.)
Still, one person can rarely live half as cheaply as two, as the Pensions Policy Institute warns [10]:
The proportion of pensioners living alone has increased as a result of divorce becoming more prevalent at older ages and increased longevity leading to widows and widowers living for longer.
Living alone tends to decrease income due to the loss of a partner’s pension and reduce living standards as a single person requires more than half of the income of a couple to maintain the same living standards.
Hmm, divorce, yes, that’ll screw things up, so be nice.
Watch out, too, if the new State Pension is a fundamental part of your retirement calculations. Most people will inherit the square root of naff all [11] from that quarter when their partner dies.
Finally, if your data points to long life then put an annuity on your ‘to do list’ for your early seventies.
Annuities are currently the best financial tool we have for buying lifetime income cheaply [12], aside from the State Pension. There are pitfalls to avoid, they are much misunderstood, and you need to live well into your 80s to come out ‘ahead’, but annuities are a great way to live long and prosper.
Take it steady,
The Accumulator
Bonus appendix: Survival probability calculation for a couple
Take the probability that you will be alive in 50 years, for example:
Jill = 25% chance
Jack = 10% chance
The probability that both of you will be alive in 50 years:
0.25 x 0.1 x 100 = 2.5%
To work out the probability that either of you will be alive in 50 years:
The chance that Jill will be alive but Jack will not: 0.25 x 0.9 x 100 = 22.5%
The chance that Jack will be alive but Jill will not: 0.10 x 0.75 x 100 = 7.5%
The chance that at least one of our pair will be alive in 50 years:
2.5% + 22.5% + 7.5% = 32.5%
Check out more investing maths fun [13] with Monevator!