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.
- 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,