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 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 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 by Dr Paul Cox of the Birmingham Business School shows why. For a heterosexual couple:

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 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:

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) 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 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 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.

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.

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:

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 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, 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 with Monevator!

What caught my eye this week.

Like anyone who understands the mathematical case for index funds, I find the attacks against them almost universally spurious.

As Rick Ferri wrote this week on Forbes:

The truth about index funds must be repeated often because lies are constantly being told. They are successful because they are good. Those who cry wolf either don’t know the truth or have a strong financial incentive to ignore it.

Happily, the message seems to be more than getting through. The Abnormal Returns blog noted this week that with US equity passive and active strategies now having equal amounts of trillions under management, the question is how much further passive investing can grow.

Before we get carried away, I’d note that much of those ‘passive’ trillions are in ETFs. And ETFs are often used as trading vehicles by fund managers. So it’s unclear to me whether more than 50% of invested money really is lying on a metaphorical sun lounger, accepting the market’s return while its owner does something more interesting instead.

Nevertheless, the direction of travel is clear. Ever more investors are passively accepting what the market gives them – minus tiny fees – and building long-term financial plans around that reality.

What’s the catch?

This brings me to an interesting opinion piece in the Financial Times – and also to the only push back against the rise of index funds I’ve ever found persuasive.

Starting with the latter, occasionally someone says something like:

Index funds make all this too easy. I can put my money into an all-in-one passive equity and bond fund, leave active investors to make all the hard decisions, and take 8-10% a year? It is too good to be true. Stuff like that usually ends badly in the financial markets.

And this touches a nerve because… I sort of agree. When something works too well investing, with too little downside, well, sooner or later it usually blows up.

Now of course index funds do come with downside. Shares definitely go down as well as up!

I hear people, especially in the US, saying stuff like “I play it safe with my S&P 500 index fund and don’t take too many risks”.

That is a ten-year bull market speaking.

But let’s put normal volatility to one side. There is still an inherent tension with index funds in the strategy being the easiest AND cheapest AND biggest AND YET it relying on a shrinking supply of people doing the most expensive thing, which also happens to be the hardest, for overall lower returns.

Then again, tension-schmenshion – active investing is a zero sum game. That won’t – can’t – change.

So how does too-good-to-be-true resolve itself?

Let them eat bonds

Back the FT article [search result] where author John Dizard compares confident equity investors to the indolent aristocrats of the French Revolution, adding:

The retirement savings/investment industry is promising the creation of a class of notionally idle, ie retired, people which will be at least an order of magnitude larger as a share of the population than la noblesse.

This group would be with us for decades alongside a stagnant (at best) working-age population.

At the same time Prof Siegel and the equity cult would ‘reform’ state entitlements so those without equity portfolios have to perform real work up to and even through their 70s.

The statistical construct of eternally compounded 6 per cent-plus investment returns has allowed upper middle class people to believe this Disney movie.

Doesn’t Dizard have a point?

At least active investing looks like work.

At least in the old days a saver giving their money to a fund manager looked like a risk-taking investor.

And at least ducking in and out of the market in a futile effort at market-timing looked like skill, risk, and reward at play.

Sure in reality we know the market’s aggregate return is the same, whether the money is investing passively or actively, ignoring fees.

But if the woeful politics of the past few years have taught us anything, it’s surely the importance of optics.

Perhaps the Achilles’ Heel in the kind of dial-it-in global-tracking we champion on Monevator could be political backlash, rather than bogus mathematics?

I’m not convinced but it’s worth a ponder.

What do you reckon?

[continue reading…]

When we die is a matter of some personal concern. Ideally it won’t happen tomorrow, but it’s on the cards – particularly the card featuring the bony fella with the sharp gardening implement. In the meantime, our life expectancy matters because life is not cheap.

If you’re going to live off your portfolio it needs to be large enough to cover you and your loved ones against the most ironic investing risk of all – longevity risk.

Longevity risk for individuals is the danger that you hit the vitality jackpot but outlive your money.

The infamous 4% rule is calibrated for 30-year plans. However many of us have a realistic chance of lasting 40, 50 or even 60 years – and that’s without resort to scientific breakthroughs.

Blogger Early Retirement Now has shown that sustaining your portfolio through each added decade requires more risk and/or money. So we have to face the facts of life – we need an idea of how long our time upon this Earth might last.

Life expectancy: how long have I got?

The obvious way to guesstimate the length of your mortal coil is by using national life expectancy data. But if you simply google ‘average UK life expectancy’ then you’ll seriously underestimate your longevity risk.

Average life expectancy for males is currently 79.2 years. Females clock in at 82.9. But those headline stats do not squarely site you within swiping distance of Death’s scythe.

You can check how off-beam they could be for you by using the life expectancy calculator provided by The Office Of National Statistics (ONS).

Here’s my result:

If I type in my current age and sex then my average life expectancy is 85 – or 88 if I switch to being a woman.

I’m already up six years versus the UK male average of 79.2. Go me.

This happens because my personal statistic eliminates all the older people who are closer to Heaven’s Gate than me. Lifespans are expected to improve over time. My life expectancy would be 87 if I was 20 years younger and hoping to cash in on improved medical treatment, gene therapy, or artery-cleaning nanobots.

Please sir, can I have some more?

My chances of making my average life expectancy are higher than 50%, as you can see in the chart.

I’ve got a 25% shot of reaching age 94. I don’t fancy running the risk of going broke any earlier than that when the odds are so high.

I’ll even see my 99th birthday in one out of 10 possible futures.

From a planning perspective, 10% seems like a reasonable cut-off point. I’m prepared to take the risk of making it to a telegram from Her Maj without a penny left in my pot. That means I should plan for an estimated lifespan of more than 50 years if I retire today.

But I’m not retiring today. Moreover, today’s 65-year-old male is expected to live on average to age 86. That’s higher than my average of 85 even though I’m 20 years younger!

What gives? Was yesterday’s model male made of tougher stuff?

Well, the 65-year-old has already ducked the misfortune that can take out anyone at a younger age. By virtue of surviving to any given age, you patently haven’t died earlier.

In everyday life that goes without saying – I never congratulated grandma on her persistence. But it does matter in the average lifespan game.

The headline UK life expectancy figure measures death rates from birth. Therefore it’s lowered by everyone who fell at the earlier hurdles. By the time you’re 25, 65, or 102, that ‘from birth’ number is less and less relevant. It’s the average mortality data for your current age cohort that tells you more about your chances later in the race.

A quick tap into the calculator tells us that today’s 100-year-old is expected to make 102. They have a 25% chance of celebrating 103.1

Personalising life expectancy

The UK’s Institute and Faculty of Actuaries says:

In retirement planning, survival to the age when a pension starts is assumed, so it’s appropriate to use this higher lifespan estimate.

Popping your future retirement age into the ONS life expectancy calculator won’t give you a personalised result, but we can delve deeper into the data to find it.

To bag your own average life expectancy for the year you intend to retire:

Clickety-click on the ONS’ latest Past and projected data from the period and cohort life tables.2

• We want the ‘Expectation of life’ datasets.
• Choose your region: England, Scotland, Wales, or Northern Ireland.
• Set your level of optimism – the datasets include projections of future life expectancy gains. Go with the principal projection if you like consensus, but high and low life expectancy projections are available to suit your mood. High life means future advances are unexpectedly strong, not “pick this dataset if you like champagne and sports cars.”

You’ll now be staring into a spreadsheet. What a way to spend your remaining life expectancy.

Choose from:

• Males Cohort ex tab
• Females Cohort ex tab

Ignore the Period tabs.

• Pick the year you’d like to retire. I choose 2023.
• Cross-reference that column with the age you’ll be in that year – see the ‘Attained age (years)’ column on the left-hand side of the spreadsheet. In 2023 I’ll be 52.
• The number at the intersection is your average remaining life expectancy at that age.

If you get lost, the ‘Interpreting the tables’ tab on the spreadsheet will guide you home. Read the ‘Cohort tables’ section of the explainer.

What’s another year?

My year group (or cohort) will have 34 years left on average at age 52, according to the Expectation of life, principal projection, England.

That makes my average life expectancy 86, if I can hang on until 2023. I gained another year! I’ll therefore stick with my initial plan of assuming I could still be going like a Duracell bunny at 99. If you’re younger or intend to retire later then you’ll probably get a more meaningful result.

I could push my 10% cut-off to age 100, but this kind of fiddling around the edges runs into the illusion of precision. The risks you take in retirement are not managed by decimal points.

The main thing is to use cohort life tables and not period life tables for your personal estimates.

Period life tables assume that mortality rates remain the same for the rest of your life. They are useful for comparing results across populations and time periods.

Cohort life tables adjust life expectancy for each year group according to past and projected mortality improvements. Your cohort life table result shows your chances of survival given your year of birth. It filters out the less relevant results of people who are younger or older than you.

The Institute and Faculty of Actuaries agrees individuals should use cohort life tables:

If the question is “What lifespan should I expect?” the technically correct answer will be given by cohort life expectancy for a specific cohort.

The average UK life expectancy figures – the 79.2 for males and 82.9 for females – are taken from period life tables. Media outlets and misinformed financial planners are prone to quote these better known numbers but this is a mistake, as the ONS points out:

In the 2016-based projections, cohort life expectancy at birth is typically around ten years higher than the respective period life expectancy at birth.

The ONS life expectancy calculator uses cohort life table data for your current age. Sure, cohort life expectancies are only as good as their assumptions but we can only use the tools we’ve got. You can always check your results again in another five years or so, as mortality projections are apt to change.

Incidentally, all that hyper local data that suggests you’ll live to 206 if you live in Kensington, or die in the cradle if your neighbours love their fags and chips? It’s all period life stuff – don’t rely on it for personal use.

Life expectancy factors

There are still plenty more years up for grabs though. You should expand your plan if you score well on these industry-standard factors:

• Smoking (it’s bad apparently)
• Heavy drinking (you get a bonus for moderate alcohol consumption)
• Diet (plus points for heavy chocolate consumption. Okay, wishful thinking on my part)
• Education (more!)
• Physical activity (more! But not the dangerous kind. Fit base jumpers don’t last)
• Employment (have a job, have a good job)
• Disposable income (more!)
• Marital status (more! I mean don’t be divorced, widowed, or messing about on Tinder)
• Preexisting conditions / family health history (have good genes, don’t get sick)
• Early life conditions (as above and don’t be malnourished in childhood)
• Medical technology (take good drugs)

We’re wandering into self-certification territory here because the ONS don’t program these factors into their cohort life tables. There are various life expectancy calculators (often devised by insurance companies) that filter for some factors.

I’ll cover such calculators in the future, but the sneak preview is I typically levelled up my life expectancy by a few more years using them because I tick most of the boxes above. Though my mum was surprised when I quizzed her on my in utero conditions.

You’ll probably do well too, dear reader. It’s a scientific fact that Monevator is good for your health. Alright, it might just be that Monevator is read by people with above average income and education levels rather than chain-smoking stunt drivers, but you could consider extending your estimated lifespan by another five years to take into account your VIP status (just pop the promo code MONEVATORNORIP into the calculator).

Obviously this stuff is highly uncertain. I haven’t read anything conclusive on how much each factor contributes to average life expectancy, or on how much they bleed into each other.

Still, we more or less know the score: broccoli good, smoking bad, and more money means less time spent in the NHS queue.

What’s less obvious is how the introduction of your significant other should affect your life expectancy planning and how that calculation affects the viability of your financial plan. We’ll cover that in the next post.

Take it steady,
The Accumulator

1. A 125-year-old has a life expectancy of 126, then the calculator breaks. [↩]
2. Land here for ONS life expectancy updates, too. [↩]