THE ACTUARIES LONGEVITY ILLUSTRATOR
THE ACTUARIES LONGEVITY ILLUSTRATOR: FREE, FUN & FLEXIBLE
By Mark Shemtob CFP® No CFP® working in the retirement planning space can service their clients without a frank discussion on longevity (life expectancy). How long one expects to live will impact decisions on investment selections, annuity purchase options, withdrawal rates, estate planning, life style choices, Social Security claiming age and more. Of course, no one is certain as to how long they will live in retirement. Consequently, the planning process requires a robust analysis of the longevity likelihoods and the development of strategies that properly reflect those likelihoods. The CFP® professional requires tools that can help them in this challenge when working with their clients in initial retirement planning and ongoing monitoring.
The actuarial profession has always been at the fore front of longevity research. Accurate predictions of longevity are required to create and evaluate life insurance and annuity products. The actuarial profession has recently embarked on an initiative to help the public gain a better understanding of longevity. The American Academy of Actuaries and Society of Actuaries have developed an on-line tool that can assist both advisers and their clients in better understanding longevity expectations. The Actuaries Longevity Illustrator can be found at http://www.longevityillustrator.org. This tool allows either a single individual or a couple to view the likelihood of living to alternative ages based on their current ages, genders, whether they smoke, and general health status. The projections shown by the Actuaries Longevity Illustrator are based upon mortality tables used by the Social Security Administration. Mortality rates vary for males and females. In addition, there is an assumption that mortality rates will improve based upon research performed by the Society of Actuaries. The mortality rates are further adjusted based upon smoking habits and general health.
The Actuaries Longevity Illustrator development is based on the belief that longevity should not be viewed as a single number; that is how many more years one can expect to live. When planning is based only on life expectancy as a single number; the consequences of living years beyond that projection are problematic. Instead life expectancy should be viewed in terms of likelihoods or probabilities answering the following question. What is the probability of living to a certain age? The higher the probability the more one needs to plan on it occurring, however when the probability is small but not insignificant one must also recognize that it could occur. A good financial adviser will help the client create cost effective strategies to plan for that likelihood depending on the actual probability of occurrence.
The above concept can be illustrated with the following example. A 65-year-old nonsmoking male in average health has a life expectancy of 20 years. Thus, he might be inclined to plan on spending down his retirement nest egg by age 85. However, there is a 25% chance that he will live to age 92 or beyond. Given a large enough group one out of every four individual in this cohort will live to age 92 or longer. Problem is we don’t know which one of the four. Thus, all retirees should consider the possibility. Retirees need to be educated to appreciate that using only life expectancy for planning when there is a meaningful possibility of living far longer, is not sound planning.
I encourage all my CFP® colleagues to give the tool a try. It is very easy to use and there are charts, graphs, and explanations that accompany the results. The next time you meet with a retirement planning client and when the topic of life expectancy comes up, consider using the Actuaries Longevity Illustrator to help guide the discussion.