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The Trouble With Life Expectancy Calculators

There are better ways to estimate how much you'll need in retirement


(This article appeared previously on MarketWatch.com)

When it comes to life-expectancy calculators designed to help you estimate how long you might live, for retirement planning purposes, I've found: Good info in, garbage out. 

I recently tried out four life-expectancy calculators. After typing my age, marital status, health and the like into calculators designed to help me create a sound retirement plan, I learned that my life expectancy was either 79, 82½, 83 or 92.
“Given that the results vary, they can’t all be right,” joked Rick Miller, a certified financial planner and the president of Sensible Financial Planning in Waltham, Mass. “I think I wouldn’t make any important decisions based on the calculators.”

(MORE: Retirement Calculators Can Be Bad For Your Wealth)

Indeed. There’s a big difference between living to 79 or living to 92, and planning for one or the other extreme (or anywhere in between for that matter) could make a big difference in how much I save and spend before and during retirement; how I invest before and during retirement; how long I work and how much or how little I leave to loved ones.
So what gives? And, more important, what should those planning for, or living in, retirement consider when trying to 1) estimate how long they might live and 2) manage the risk of outliving their assets? Running out of money could be easy if you use a calculator that understates life expectancy.
The answer to the first question is fairly easy to answer.

“The methodology isn’t precise,” said Steve Vernon, president of Rest-of-Life Communications, research scholar at the Stanford Center on Longevity, and author of Recession-Proof Your Retirement Years: Simple Retirement Planning Strategies That Work through Thick or Thin. “There are many ways of estimating longevity.”

According to Chuck Yanikoski, president of Still River Retirement Planning Software, at least four things affect outcomes in life expectancy calculators:
1. Which mortality table is used  “There are lots of them out there, some based on general population statistics, and others developed for special purposes,” said Yanikoski. “Retirement software developers tend to use annuity or pension mortality tables, but these exaggerate life expectancy because those tables need to be conservative to assure that the institutions funding them don’t run out of money.”

(MORE: 6 Biggest Risks to Retirement Security)

For his part, Yanikoski prefers to use life insurance mortality tables when calculating life expectance, “because they are not biased in that way, and they reflect the socioeconomic status of the kind of people who do retirement planning.”

2. What factors are taken into account “These are usually very clear, objective criteria, and mortality tables commonly take them into account,” Yanikoski said. Most ofetn these are: age, sex and smoking status. 

Some calculators add other factors, such as health, family history, ethnic background and lifestyle issues.

“Some of these are objective, some are subjective,” he said. “The problem with all of them, though, is that their impact on mortality is not clear. Even where studies of the impact of specific factors on mortality exist, there are rarely studies that combine multiple factors. So adding more questions does not necessarily improve the legitimacy of the answer, and may actually detract from it.”

(MORE: 8 Ways to Derail Your Retirement)

3. Whether the calculations are based on a single life expectancy or joint life expectancy According to Yanikoski, joint life calculations always produce higher ages, unless one person is already dead.

4. How competent the software developer is “As a software developer myself, let me just admit that this is something that cannot be taken for granted,” he said. "Unless an actuary who specializes in mortality issues has validated the results, everything is suspect." 

So what should people do given that live expectancy results vary from calculator to calculator?

"Mainly, don’t worry too much about life expectancy," Yanikoski said. "The main value of these calculators is to clarify a simple fact: you might live a lot longer than you think you will.”

An Elusive Number
Yanikoski says the average person estimates his or her life expectancy in one of two ways: 1) I’ll probably live to normal life expectancy, give or take, and that means late 70s or early 80s or 2) I’ll probably live to about the age my father or mother lived.
“The first one is wrong, because the life expectancy numbers you hear or read in the news from time to time are, as mentioned above, life expectancy at birth,” he said. “But someone doing a retirement planning calculation has already survived the problems of infant mortality, childhood diseases, teenage driving accidents, and other random causes of death. So if life expectancy at birth is in the high 70s, by the time you’re 60 or 65 your life expectancy is well into the 80s, depending on gender, general health and personal habits.”
The second estimate is wrong, he said, because overall health in the U.S., and health care for the elderly in particular, continues to improve. “The heart attack or cancer that killed one of your parents might very well be preventable or survivable for you,” he said.
Bottom line: “Both of these common errors tend to lead to underestimates of life expectancy, which is very dangerous if you’re planning your retirement finances,” said Yanikoski. “To the extent that any calculator educates people that they are probably going to live longer than they expect, that’s a good thing.”
A Useless Number
In the main, however, Yanikoski argues that life expectancy is otherwise a fairly useless number to know.

“The odds that you will die in the very year of your official life expectancy as calculated today are really quite small,” he said. “Most people will die either sooner or later than that, and, in a lot of cases, much sooner or much later. If you plan on your money lasting only until life expectancy, there’s a 50 percent chance that you’ll run out of money before you die. What good is that?”

Others share that point of view. “Life expectancy is roughly the middle of the set of possible outcomes,” said Miller. “Therefore, even if you had the true life expectancy number, you still wouldn’t know what to do. You have to know how long you will live, and no one knows that.”
Vernon also said that differing life expectancy calculator results illustrate that uncertainty around how long you’ll live is one of the biggest retirement planning challenges. “Even if there was a precise way of measuring your expected life expectancy, there would still be tremendous variability around how long you’ll actually end up living,” he said. “People need to plan for this uncertainty.”
How would one do that?

Well, a better approach, according to Yanikoski, would be to use a calculator that tells you at what age you had a 25 percent, 10 percent, 5 percent, or 1 percent chance of survival. (Yanikoski developed such a calculator years ago, though the company doesn’t promote it. I plugged my info into it and learned that my life expectancy (50 percent chance of survival) is age 84, but I have a 25 percent chance of living to age 90, 10 percent chance of living to age 94, 5 percent chance of living to 97, and at 1 percent chance of living to 102.

“With this kind of information, you can make a much more informed choice about what you should do,” Yanikoski said. “That’s the kind of calculator that people should be looking for.”

Miller also recommends talking with a physician, especially if you’re trying to confirm that your life expectancy is below average.
Plan to Live to Age 95
But even if you know your life expectancy, whatever it might be, and the odds of living to this or that age, Yanikoski said one major retirement planning problem remains. “You still don’t know when you’ll die, and even if you have a 99 percent chance of dying before age 101, you still have a 1 percent chance of living longer than that,” he said.
So, what should people do given that they don’t know their date of death? (As you might imagine, knowing your date of death would make retirement planning quite easy.)
“Unless your health is so bad that you are almost certain to die in the foreseeable future, you should probably plan for financial purposes on living into your 90s, and probably to about age 95,” Yankikoski said. “Then if they get to 85 or so and are still feeling pretty spry, then they might want to adjust their plans to cover them to age 100, or even longer.”
Others agree. One way is to simply plan to age 95 or 100, said Vernon. “That will certainly take more money than if you live to age 79,” he said. “But if you live to 95 or 100, great, you’ve got the money. And, if you die before then, the leftover money becomes your legacy.”
Now before you think it would be impossible to make such a plan, think again. “Most people in their 90s, even those who are healthy, spend very little except on true necessities,” Vernon said. “And they often are living in bigger homes than they need.”
Thus, a late-life financial adjustment might even be the opportunity to make changes that are actually beneficial, but that normal inertia tends to inhibit. “I’m not recommending that people go out of their way to run low on money in retirement, but rather, I’m saying that if you don’t wait too long to make the necessary adjustments, an unusually long life can be financially supportable, even if you didn’t fully anticipate it,” Yanikoski said.
Consider Working Longer
“Planning for a long life is another reason for finding some work that you like doing and do that as long as possible,” said Vernon.
Working longer accomplishes two things. In decreases the amount of time you will need your nest egg to last. Plus, it increases the size of your nest egg; working longer gives you the chance to save even more toward retirement, and have those investments grow for an even longer period before you need to tap those accounts for income.
Consider Income-for-Life Investments
Experts also say those saving for, or living in, retirement can use certain tactics/investments/insurance products to manage the risk of longevity, of not knowing how long you might live. “There are many ways to generate retirement income that lasts for the rest of your life, no matter how long you live,” said Vernon.
Those include, said Vernon, delaying claiming Social Security to maximize your benefit; buying an annuity; living on just interest and dividends or some combination of all of the above.
Also, consider a reverse mortgage as a way of generating income in retirement. Read Using Your House for Income in Retirement, published by the Center for Retirement Research at Boston College.
Also, according to the Society of Actuaries’ booklet on the subject, Managing Post-Retirement Risks – A Guide to Retirement Planning, variable annuities with guaranteed minimum income benefits or guaranteed lifetime withdrawal benefits can also help you manage the risk of outliving your assets.
Consider a Deferred Income Annuity
Part of the problem with planning for an uncertain time horizon — not knowing when you will die — can be explained this way: If you spend as if you will live to 92 and then live to 100, you will be short funds after 92. If, however, you spend that way and die at 84, you’ll have money left over.

But there is one thing you can do to solve that problem. "The only way to be sure that you will neither be short of funds nor have money left over is to annuitize all of your assets," Miller said. Of course, that decision has a number of unattractive implications, Miller said, including: 1) If you need money at 86 (say, for long-term care), you won't have it. 2) If you die before 92, your children will inherit nothing. If you hadn't annuitized, they would have inherited the remaining money.


So what’s the next best thing to do? Miller said a deferred income annuity is an “excellent” way to protect against the possibility that you will live a long time. “If you do live a long time, it pays as long as you live,” he said. “If you don’t, you did pay for the insurance and not need it, but that is the nature of most insurance.”

A deferred income annuity beginning at age 85, for instance, would provide you with income for life if you live to age 85. One easy way to make this strategy work would be to plan as if you would live only to age 85, but purchase a deferred income annuity that would provide you with adequate income just in case you live past age 85.
Buying a deferred income annuity, in a way, helps you establish your date of death and takes some of the uncertainty way from not knowing your life expectancy and the uncertainty that comes when using life expectancy calculators.

Robert Powell is a MarketWatch retirement columnist. He has been a journalist covering personal finance issues for more than 20 years. Follow him on Twitter @RJPIII.

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