How long have I got?!

by Richard Allum on 1 March 2008

Knowing how long a client can expect to live is very useful when considering most types of financial planning issues yet, apart from in some unfortunate cases, most of us cannot really say for sure when we are going to die. Despite this we still need to make a realistic assumption regarding longevity and some of the most common cases where this is required are:

  • When preparing a lifetime cash flow forecast. Underestimate and the client may well find out that they run out of money. Over estimate and the client may die sooner than expected having not spent as much money as he or she could have done.
  • Retirement options – will ASP be an issue? Is a fixed term annuity good value for money? Should a spouse’s pension be included?
  • Long term care planning.
  • Capital erosion when drawing an income; i.e. how long will this money last, how much income can I take, what investment return is required.

I know many people who apply a default longevity period to age 99, especially when preparing a lifetime cash flow.

This is certainly the case for many users of the Truth system which, along with its parent Prestwood, is the most popular financial planning tool amongst advisers I know. I think the idea is that it is better to die with some money left than to live longer and run out.

Many clients take the view that the last cheque they write out should be to the undertaker and it should bounce!! It is rather difficult to plan with that much accuracy but there are tools and resources available to help us apply a bit more of a scientific approach.

The GAD Mortality Tables provide a free to use reference table based on the average life expectancy of males and females across the UK. You can make things a bit more interesting and interactive by using some of the tools available online. A very good article with several good reference links can be found on the BBC here.

deathometer-3.bmp

Citywire and New Model Adviser have a tool on their site known as the Deathometer. You can enter your client’s date of birth and thoughts as to their own life expectancy (pessimistic, neutral and optimistic) in the box shown here. This is a fairly simplistic approach and it is difficult to know the basis of the client’s own opinion on their chances of living to a ripe old age. However, it is better than guessing.

The results are shown in an attractive chart which shows how your life expectancy changes in five year bands. Based on the information I entered in the box above, a 40 year old male with a neutral outlook will live to age 83.

deathometer-2.Png

If I change my outlook to positive I get an extra four years; a pessimistic approach means that I have three years less. The results are very similar to the GAD tables and appear to be based on historic average data. The chart looks good and graphically demonstrates to a client what the average trend will be. My main concern here is that there is no allowance made for:

  • Regional variances
  • Lifestyle
  • Current state of health
  • Occupation
  • Other risk factors

The BBC has produced a very good guide on BBC Health which takes into account many of these issues and tells you what to change. This could be of use to some clients although I am not sure how you would document this in a report!

The University of Wales Institute has produced another tool with several variables on their site. This is rather basic with a simple form to be completed which you can see by clicking here. Based on my answers I only have 35 years to go. I don’t know if that says anything about regional variances in Wales but that is not good news for me!

Other sites I have found on the same issue are:

  • Tiscali – yes them!
  • Northwestern Mutual – This is possibly my favourite tool as it asks some good questions about lifestyle and history and is presented in the form of an online game. As each question is answered, the results produce changes to the image of ‘me’ and my life expectancy (called the ‘Age Tabulator’).

My results are shown below. In case you have not worked it out, I don’t smoke (legal or illegal substances), don’t drink much, have normal blood pressure, take a little bit of exercise and had an insurance claim in the last three years. Despite all this, my life expectancy is 84 which is very similar to the Deathometer. In preparing a financial plan for me, I would factor in the likelihood that further medical advances will come along over the next 40 years extending my life a bit further in times of time if not quality. I would therefore choose a mortality age of 90 and be happy if I get there in reasonable condition.

Perhaps the most extreme site out there is The Death Clock which tells me I am going to die on 30 November 2040 – one for the diary then!

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{ 1 comment… read it below or add one }

ned kelly 5 October 2009 at 1:06

when will i dead

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