Life Expectancy Assumptions
Born Before 1962? under-estimating life expectancy may be…. fatal?
If you were born before 1962 there is mixed news, according to a report by the National Association of Pension Funds (NAPF). This is a rather concerning but important report. In essence most people over 50 years old today are under-estimating how long they will live whilst being over-optimistic about how well off they will be in retirement. This of course on the face of it is a fairly disastrous mix. That said, I have to say that I’m rather wary when contemplating reports that suggest forecasts are accurate (which is the fundamental flaw within the report). Whilst clients will testify to my rather unusual approach of discussing life expectancy at a fairly early stage of the financial planning process, it is important that you understand the implications. However, to pretend or suggest that the future is predictable in this way is really rather silly. We use life expectancy as a guide, nothing more. In reality our assumptions ought to be reviewed annually, because of a very strange quirk of life called “mortality drag” which is the statistical notion that the longer you live, the longer you will live. Strange but true. Great financial planning when all is said and done, means making your money last a bit longer than you.
Start with the end in mind
The report suggests that people in their 50’s underestimate life expectancy, though to my mind the data is somewhat open to interpretation. The most important finding was that 59% of people surveyed (aged 50-64) had not given thought to how long they might live. The ONS 2010 figures should be applied carefully and based on current age. They are also based upon statistics of people that have already died having lived a long life. So it would be reasonable to assume that thanks to those wonderful people at the NHS that we are all kept going a little longer and if we live a healthy lifestyle, perhaps longer still. However the principle is quite right in planning life, but this needs to be done with the knowledge that any such forecast will be wrong. It is a guide and nothing more. All life expectancy data is historical and can be used for is to identify national historical averages.
Born in 1961 or earlier
So for those born in 1961 such as Lloyd Cole, Peter Beardsley, George Clooney, Tim Roth, Enya, Heather Locklear, Michael J Fox, Meera Syal and Meg Ryan (who all became 51 in 2012) the UK ONS statisticians would cite historical data that for those born in the UK and living there the men have an average of 29.73 years left and the women have another 32.96 years. However, as we all know, this is no way to plan a life, indeed one might suggest that it is utterly silly. Well, I would largely agree, but for good financial planning it is helpful to at least put some sensible parameters in place that we review each year.