This week the American Academy of Actuaries and the Society of Actuaries jointly released the Actuaries Longevity Illustrator, an online tool designed to illustrate the potential range of future lifetime based on input of four factors: age, gender, whether or not you smoke and your general health. The tool designers claim that these four factors have been shown to be reasonable predictors of a person’s longevity. The results are based on the 2010 Social Security Administration mortality table, with future mortality improvement projected using the Society of Actuaries’ MP-2015 scale. We will be adding a link to this tool in our “other calculators and tools” section.
With one exception, I found the tool very easy to use and potentially helpful for determining the “expected payout period” input item for the Actuarial Budget Calculator in this website. The one exception is the input item called “illustration age.” Most (or all) of the time, you are going to want to leave that box blank, which was not particularly intuitive to me.
The chart in the results section that I found most helpful was the “Planning Horizon” chart. This chart shows probabilities of living “x” more years. The 50% probability is your life expectancy under the assumptions used in the model. As I have discussed in previous posts (see for example my post of December 3, 2014), if you use your life expectancy as your expected payout period, your spending budget will decrease as you age, all other factors being equal. That is why I have recommended assuming death occurs at age 95, or life expectancy if greater. Therefore, I recommend that retirees focus on the 25% probability of living “x” years in this chart when determining a spending budget. If you do this and enter “no smoking” and “excellent health,” the tool will generally produce a 25% probability of living past age 94 for males and 96 for females unless you are over age 80. This result is very similar to my recommendation of using age 95 or life expectancy if greater for the expected payout period in my spreadsheet.
Being an actuary, I found it interesting that inputting different general health assumptions had less of an effect on longevity than whether or not someone was a smoker. For example, a non-smoking, average health 65-year old male had a life expectancy of 20 years and a 25% probability of living 27 years, while if he smoked, his life expectancy was 13 years and he had a 25% probability of living 20 years. The smoker/non-smoker difference (7 years for males at age 65) was less for females (6/5 years). General health variations were typically 2 years for each health category at age 65.
What does this tool (and others like it) tell us? Generally, these tools confirm that we don’t know when we are going to die and that makes planning more difficult. Based on average statistics, there can be a fairly wide range of results. And the assumption we make today may change tomorrow. The expected period of retirement you choose for planning purposes will likely depend on many factors, such as results from this tool, your knowledge about family health history, your race, your income level, where you live, your personal eating and drinking habits, your smoking habits and most importantly, your risk tolerance for having to reduce your spending budget (or parts of it) if you live longer than you expect. My recommendation to use age 95, or life expectancy if greater is a relatively conservative assumption that is consistent with enjoying excellent health, not smoking and not desiring decreasing real spending budgets until reaching your late 80s. Using a less conservative assumption (fewer years of expected retirement) will increase your current spending budget and increase your risk of decreasing budgets later in life, all things being equal. On the other hand, if you have solid information that indicates your life expectancy is less than average, it makes sense to factor this knowledge into your planning calculations. For example, if you are a smoker, you may want to consider using fewer retirement years to determine your spending budget. I don’t recommend, however, that you take up smoking just to increase your current spending budget.