Saturday, January 30, 2016

Live Long and Prosper

As I have said several times in this blog, developing a reasonable spending budget would be a lot easier if we just knew when we were going to die.  In fact, one of my long-time actuary buddies, Bruce O suggested that I would probably get more readers if I simply renamed this site, “How long can I afford to live in retirement?”

So, when I saw the title, “When and how you will most likely die” recently in Business Tech, I knew that this article was going to be must-reading for this mortality nerd.  The article points its readers to an interesting interactive tool developed by Nathan Yau of Flowingdata.  Mr. Yau has mined data maintained by the Centers for Disease and Prevention containing information for people who died in the U.S. between 1999 and 2014 to develop probabilities of death by age and associated probabilities regarding reported cause of death.  Mr. Yau further segregates the data into eight reported categories (four each for males and females):  White, Asian, Black and Native. 

In terms of developing a spending budget, I’m considerably more interested in age at death than I am in  the reported cause of death.  More specifically, I was interested in probabilities of survival from a given retirement age (once I discovered that Mr. Yau didn’t really have a magical crystal ball).  I played with Mr. Yau’s tool to determine probabilities of survival to various ages for males and females currently age 65.  I wasn’t sure why, but Mr. Yau’s tool gave me slightly different probabilities each time I ran the tool.  It also takes a little dexterity to pause the aging process at the right moment.  Here is a summary of the results:

(click to enlarge)

The final column labeled “SoA” shows comparable probabilities of survival from the Society of Actuaries’ 2012 Individual Annuity Mortality table with a 1% per year mortality improvement projection.  This table is available in the “Other Calculators/Tools” section of this website.  I had to estimate probabilities of survival until age 70 for this column.   In general, the SoA table shows much higher probabilities of survival to various ages than the information gleaned from Mr. Yau’s tool.  In my opinion, the primary reasons for this are: 1) the SoA table is based on mortality of individuals who buy annuities where Mr. Yau’s experience is based on all individuals in the U.S., 2) the SoA table includes mortality improvement projections while Mr. Yau’s is based on experience from 1999-2014, and 3) as Mr. Yau’ admits, his data has some deficiencies. 

Mr. Yau’s tool shows that age, gender and race are generally factors in one’s mortality/longevity.  Of course, there are many other factors.  For example, studies have shown factors influencing longevity can include, wealth, general health, smoking, diet, weight, exercise, participating in community activities, marital status, taking part in dangerous hobbies, geographical location, etc.  I wouldn’t be surprised if some researcher has even found a positive correlation between longevity and developing a spending budget for retirement.  Suffice to say that there are a lot of variables at play and caution should be used selecting your period of retirement for budget setting purposes.  

When developing a spending budget, I recommend that retirees and their financial advisors plan on living until age 95 or the retirees’ life expectancy if greater.  Yes, this is a conservative recommendation.  I don’t recommend assuming probabilities of death at every future age even though we all have non-zero probabilities of dying every year in the future.  The fact of the matter is that either 100% of you will be alive in a given year or 100% of you will be dead.  To assume that 2% of you will die next year would just make the calculations more complicated and it wouldn’t add much value to the spending budget you are trying to determine.  Unless you are quite old, I also don’t recommend that you use your life expectancy when determining your spending budget.  The reason for this is that as you age, your expected age at death increases.  Thus, your expected period of retirement will not decrease by one year for each year you age and your spending budget will therefore decrease in the future in each year when your expected age at death increases by that one year, all things being equal. This decrease is illustrated in my post of December 3, 2014.  By assuming death at age 95, the retiree avoids these budget decreases until approximately age 89, when budget decreases may be more acceptable to the retiree.  You can assume a shorter period of retirement, but this will lengthen the potential period when your survival will result in decreases in your spending budget, all things being equal. 

Well, enough time spent on this morbid subject.  I leave you today with a Mr. Spock’s emoji wishing you long life and prosperity in your retirement.