Friday, July 23, 2021

How Should the Increased Mortality Associated with Covid-19 Affect Your Retirement Plan?

On July 21, 2021, the U.S. Centers for Disease Control and Prevention (CDC) announced in a new report that life expectancy [at birth] in the US “declined by a year and a half during 2020 due in large part to the coronavirus pandemic.” According to USA today, the decrease from 78.8 years to 77.3 years was the largest drop since World War II. Decreases were much larger for Hispanics and non-Hispanic Blacks than for non-Hispanic Whites.

This post will discuss:

  • How the CDC develops life expectancies
  • The differences between life expectancy at birth, life expectancy at a later age and probabilities of survival to a given age
  • The differences between life expectancies developed by the CDC vs. Lifetime Planning Periods (LPPs) we recommend for determining your Floor Portfolio and the present value of your Essential Expenses
  • Our thoughts on how the increase in mortality experienced in 2020 due to Covid-19 should affect your planning assumptions.

Rather than keep you in suspense, if you have been vaccinated for Covid-19 (which we hope you have), we recommend no change in your LPP assumption for determining your Floor Portfolio and the present value of your Essential Expenses. 

How the CDC develops life expectancies

By comparing the numbers of deaths during 2020 at each age with the numbers of individuals at each age who were alive at the beginning of 2020, the CDC develops raw probabilities of death at each age. These probabilities are then smoothed and used to develop a mortality table. This table then provides probabilities of living from age x to age x + 1 and life expectancy at birth is the sum of these probabilities from all ages starting at birth.

Differences between life expectancy at birth, life expectancy at a later age and probabilities of survival to a given age

Life expectancy at birth provides an overall measure of a country’s general level of mortality and can be useful for comparing the relative mortality levels of two different countries (or of one country over time). Of more use for personal financial planning, however, is your remaining life expectancy (your life expectancy from your current age going forward). Even more useful, in our opinion, are probabilities of survival to various ages from your current age. For example, the following table compares life expectancies at several ages from the CDC reports from 2020 and 2016 with average male/female probabilities of survival from age 65 from the Actuaries Longevity Illustrator (ALI) for non-smokers in excellent health. For direct comparison, the 50% probability of survival figure from the ALI is considered the “life expectancy” at age 65 under the mortality assumptions used in the ALI.

(click to enlarge)

This table shows that life expectancies at various ages, based on the CDC US population data, have decreased at various ages from 2016 to 2020, with the decreases being somewhat smaller for life expectancies at older attained ages. It is important to note, however, that it would be very aggressive to use the life expectancy at birth figure of 77.3 years for personal financial planning if you are currently age 65 or 75.

A second thing to note from the table is that the life expectancy of 24 years (50% probability of survival) for a 65-year-old non-smoker in excellent health from the ALI (the lower box) is more than 5 years longer than the 2020 CDC life expectancy for a 65-year-old. This significant difference results because the data used to develop the ALI probabilities of survival is not population-wide data and includes individuals more likely to be in good health and purchase life annuities. 

A third thing to note from the ALI portion of the table is that the expected age of death for a non-smoker in excellent health currently age 65 is fairly wide. While half of the individuals currently age 65 are expected to die between 82 and 95, approximately 25% are expected to die prior to age 82 and the remaining 25% are expected to die after age 95. This wide variation in expected age at death (among healthy individuals or other individuals) is one of the significant problems involved in financial planning for retirement, because it is difficult to know how long our assets must last. As a result, most individuals prudently plan to outlive their life expectancy by at least 5 or 6 years. 

The Difference between CDC Life Expectancies and Default assumptions for pricing the present value of your Essential Expenses

Consistent with basic financial economics principles, the assumptions we recommend for pricing the present value of your Essential Expenses are intended to be approximately those used to price inflation-indexed life annuities. Therefore, our default assumption is that your mortality will be in accordance with the 25% probability of survival from the ALI for a non-smoking male (or female) in excellent health. Thus, if you are age 65 and a male, you are currently assumed to live for another 29 years and if you are 65 and a female, you are currently assumed to live for another 31 years under the default assumptions. Countering the conservatism of using these longer default LPP assumptions is to some degree offset in the budget calculations by also using the same assumptions to determine the present value of your lifetime income sources such as Social Security, pensions and annuities. 

The ALI LPPs we currently recommend are based on adjusted mortality tables used by the Social Security Administration in their annual Trustees Report (most recently issued in the Spring of 2020) and do not reflect the effects of Covid-19. It is certainly possible that these LPPs may be slightly reduced when the ALI is updated in the future. And, it may be possible that life insurance companies will reflect these higher mortality assumptions in their life annuity pricing. To date, we are not aware that this has been the case.

As discussed in our post of April 28, 2021, users should feel free to use more aggressive assumptions for determining annual spending from their Upside Portfolio. This may include, for example, assuming a shorter lifetime planning period (or higher real rates of investment return) than assumed in determining the present value of Essential Expenses.

The default LPP assumptions we recommend for determining the present value of your Essential Expenses are indeed longer than CDC generated life expectancies (or probably even longer than your own estimate of your life expectancy) for several reasons:

  • If you are reading this blog and serious about retirement planning, your life expectancy is probably longer than general population life expectancy
  • It is simply imprudent to plan to live only as long as your life expectancy-- 50% of individuals will live longer than their life expectancy
  • The default assumptions are intended to be consistent with costs of lifetime insurance products for healthy individuals and not necessarily a reflection of your own mortality.

If you are aware of specific health issues that you expect will have a negative impact on your life expectancy (or your spouse’s life expectancy), you may wish to reflect this knowledge in determining your spending from your Upside Portfolio.


Covid-19 has had a negative impact on life expectancies in the U.S. and elsewhere. It is not clear what the long-term mortality implications will be, however, particularly for those who have been vaccinated against the virus. Assuming you have been vaccinated against the virus, we recommend that you stay with our default assumptions for pricing the present value of your future Essential Expenses. As always, you may wish to do some “what-if” analysis by measuring the impact on your spending and investment strategies of assuming a somewhat shorter lifetime planning period or periods. You can do this by using the assumption override feature in our workbooks.