This post is follow-up to our post of December 22, 2024 and will again highlight the benefits of using the Actuaries Longevity Illustrator (ALI) to help you develop reasonable lifetime planning period (LPP) assumptions for your household. As we did in Part 1, we will also discuss the financial implications of planning for longer-than-life expectancy LPPs.
We have been recommending the use of the ALI in our workbooks since 2017. Readers may find additional discussion of the ALI and longevity planning in the following posts:
- November 17, 2021 (in which we discussed rounding issues that have yet to be resolved)
- September 14, 2021, and
- July 15, 2023
Changes have been made to the ALI since it was first released in 2016, including periodic updating of the mortality assumptions used in the calculations. The default assumptions used in the Actuarial Financial Planner (AFP) are based on the 2022 version of the ALI for non-smokers in Excellent health with 25% probability of survival but have not been updated for subsequent changes in mortality. For this reason, we suggest that you actually visit the planning horizon section of the ALI website and develop your own lifetime planning period assumptions. With one exception, the LPPs in the default section of the AFP are easily overridden by following the assumption override process. The one exception is the LPP for “both alive” which is calculated from the first three LPPs you enter to avoid the rounding issue discussed in our post of November 17, 2001.
Once you have entered preliminary data, the information used in the ALI is very easy to change. For example, if you want to see what the impact of changing the health status of one of the members of the household from “Excellent Health” to “Average Health”, you can do this easily by changing the data in the box on the left and hit the “update results” button.
The following table shows LPP results for a 65 Male and 65 Female couple for various assumed health statuses (for both), smoking statuses (for both) and probabilities of survival.
Assumed Health | Smoker? | Probability of Survival | LPP1 | LPP2 | LPP Either Alive | LPP Both Alive* |
Excellent | No | 10% | 33yrs | 35yrs | 36yrs | 32yrs |
Excellent | No | 25% | 28 | 30 | 33 | 25 |
Average | No | 10% | 31 | 33 | 34 | 30 |
Average | No | 25% | 26 | 29 | 31 | 24 |
Average | No | 50% | 21 | 23 | 27 | 17 |
Poor | No | 25% | 23 | 31 | 32 | 22 |
Poor | Yes | 25% | 15 | 18 | 20 | 13 |
*LPP Both Alive for this chart (and the Actuarial Financial Planner) is equal to LPP1 + LPP2 -LPP Either Alive to avoid a rounding error.
You may wish to develop your own table of LPP assumptions like the one above based on your own data.
You can see that there is not a great deal of difference in the LPPs for individuals in Excellent and Average Health with the same probability of survival, but there is a significant difference for those in poor health and especially those who are smokers. According to the ALI, non-smoking 65- year-old males and females today in average or excellent health can expect to live until age 90 or longer at least 25% of the time. By comparison, the ALI indicates that the life expectancy (50% probability of survival) for a non-smoking age 65-year-old male and female in average health is age 86 and age 88, respectively.
In addition to encouraging you to plan for a longer retirement period than your life expectancy (like we do), the ALI encourages you to consider couple longevity. For our hypothetical non-smoking age 65 couple who are both in average health, it says:
“Thinking about your longevity as a couple is important. Based on the chart, there is a 50% chance that both you and your spouse/partner will still be alive 17 years after retirement (the green bar), and then an additional 10 years where one of you outlives the other (27 years in total).”
You can see from the table above that if the 25% probability of survival is chosen for non-smokers in excellent health, our hypothetical couple will have a 25% chance that both will still be alive 25 years from now (age 90) and then an additional 8 years where one outlives the other (33 years in total). In planning for this couple, you could assume that recurring expenses will continue unadjusted for 33 years until age 98, but that would be fairly conservative, and it may be more reasonable to assume that household expenses will decrease upon the first death within the couple.
The default assumption in the AFP assumes that recurring expenses will decrease by 33% after the first death within the couple. This assumption of reduced expenses after the first death can make a significant difference in the present value of recurring expenses projected for a household as compared with assuming that expenses will continue at 100% after the first death. For example, my wife is eight years younger than I am, and under the default assumptions (and the 33% reduction), the present value of our recurring essential expenses is about 12% lower than if we assumed no reduction upon the first death.
Planning Key: It is not how long you expect to live, but how long you plan to live
Prudent retirement planning requires you to plan to live longer than your life expectancy (whether that life expectancy is based on poor, average or excellent health). We recommend using the ALI tool with a 25% probability of survival for determining your LPPs. If you believe your (or your spouse’s) health is not “Excellent”, you can select a more appropriate health status from the ALI and use the resulting LPPs.
Financial planning in or near retirement involves comparing household assets with household spending liabilities. We encourage you to annually calculate your Funded Status, which is the present value of your household assets divided by the present value of your household spending liabilities.
If you are planning to live longer than your life expectancy for purpose of determining your household spending liabilities (and as noted above, you should) and your health is not poor, you should consider investing in assets that reward longevity to fund the present value of your essential expenses. These assets include pensions, deferring commencement of Social Security and life annuities. Purchasing or investing in these assets will generally increase your Funded Status by increasing the present value of your assets relative to your spending liabilities.
We frequently read “break-even” analyses for deferral of Social Security or analyses of other lifetime income products. Such analyses generally ignore the liability side of the planning equation and the need to plan to live longer than your life expectancy. As noted above, analysis of the financial viability of retirement assets should consider how long you plan to live, not how long you expect to live.
Selecting LPP assumptions to use in the AFP is an annual process. Mortality assumptions change and health statuses change over time. In addition, the older you become, the later your expected date of demise will generally be.
Summary
The Actuaries Longevity Illustrator is a great planning tool for helping you plan to live longer than your life expectancy. We encourage you to use it to develop LPPs for use in the Actuarial Financial Planner. We also encourage you to use your LPPs in analyzing the financial benefits of investing in lifetime income products.
