One of the most crucial decisions in a financial plan is determining a longevity factor, which is a gentler, more clinical way of saying picking a date when someone might die.
The risks involved are clear. Assume too short a life span and face increased risk of running out of money before you run out of life. Plan too long a life span and you might be short changing yourself the ability to enjoy what you’ve earned to the fullest. When boiled down to its simplest level, it is the initial, core question of any good financial plan.
We often have conversations with clients about how we come to the assumptions we make in the plans we construct for them. I’d like to spend a few minutes explaining the rationale behind our default age assumptions, why we opt to rarely, if ever plan for ages younger than those defaults and why the case can be made more and more to bump those ages up even further.
The life expectancy used by our planning software, MoneyGuidePro, typically defaults to 90 for men and 92 for women per the most up to date mortality tables available from the Society of Actuaries. This will vary based on a client’s age. The program looks at the table and chooses the age that the client has a 30% probability of surpassing. In other words, while these ages may seem high, there’s actually a 30% chance of living longer than the default.
From there, we consider factors such as past family longevity, health issues, a client’s comfort level with the assumption and others to determine the most appropriate age for the plan.
To look more closely at the statistics, the same actuarial tables from the Society state that a male, age 65 today has a 50% chance of living to 92. It’s 94 for females. For a couple that both make it to age 65, there is a 50% chance of one partner living to age 97.
These probabilities come at a time when average life expectancy in this country is 78.7 years at birth. That number is expected to continue a rapid rise, reaching a plateau somewhere in the low 90s by 2050. It is that kind of trajectory that leads some actuaries to believe that the first human being to live to age 150 already walks (or, more likely, crawls) among us. And all of this is based on the notion that we’ll only continue to improve our ability to treat the effects of aging as opposed to major breakthroughs in changing the rate of aging itself. Those breakthroughs could alter life expectancies to a potential point of biological immortality, which is not to say that we’ll be immortal, only that it will be disease and other factors that will cause death, not the effects of aging.
As we see more and more 90th birthday parties and as Willard Scott’s list of birthday wishes on the morning news continues to grow, we’ll continue to encourage using conservatively aggressive life expectancies in your plan. Our goal is for your money to outlive you, not the other way around. If you have any questions about the life expectancy assumption or any other factor in your plan, please let us know.
We hope all of our clients, their families, friends and the other trusted advisors with whom we have the pleasure of working have a very safe and Happy 4th of July!